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ch16lec - Chapter 16 Equilibrium Econ 306 Rust Cho Diaz...

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Chapter 16: Equilibrium Econ 306 Rust, Cho, Diaz
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Market Equilibrium A market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* q* D(p*) = S(p*); the market is in equilibrium.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* S(p’) When D(p’) < S(p’); an excess of quantity supplied over quantity demanded. p’ D(p’) Then, Market price must fall towards p*.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* D(p”) When D(p”) > S(p”); an excess of quantity demanded over quantity supplied. p” S(p”) Then, Market price must rise towards p*.
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Market Equilibrium An example of calculating a market equilibrium when the market demand and supply curves are linear. D p a bp ( ) ± S p c dp ( ) ² At the equilibrium price p*, D(p*) = S(p*). That is, a bp c dp ± ² * * which gives p a c b d * ± ² and q D p S p ad bc b d * * * ( ) ( ) . ² ²
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Market Equilibrium p D(p), S(p) D(p) = a-bp Market demand Market supply S(p) = c+dp p a c b d * ± ² d b bc ad q * ² ²
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Market Equilibrium Can we calculate the market equilibrium using the inverse market demand and supply curves? Yes, it is the same calculation. the equation of the inverse market demand curve. And the equation of the inverse market supply curve. q Dp a bp p a q b D q ± ± ± ( ) ( ), 1 q S p c dp p c q d S q ² ± ² ± ( ) ( ), 1
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Market Equilibrium q D -1 (q), S -1 (q) D -1 (q) = (a-q)/b Market demand S -1 (q) = (-c+q)/d p* q* At equilibrium, D -1 (q*) = S -1 (q*). Market inverse supply
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Market Equilibrium p D q a q b ± ± 1 ( ) p S q c q d ± ² ± 1 ( ) . and At the equilibrium quantity q*, D -1 (p*) = S -1 (p*). That is, a q b c q d ± ± ² * * which gives q ad bc b d * ² ² and p D q S q a c b d * * * ( ) ( ) . ± ² ± ± 1 1
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Market Equilibrium q D -1 (q), S -1 (q) D -1 (q) = (a-q)/b Market demand Market supply S -1 (q) = (-c+q)/d p a c b d * ± ² d b bc ad q * ² ²
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Market Equilibrium Two special cases: – quantity supplied is fixed, independent of the market price, and – quantity supplied is extremely sensitive to the market price.
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