Tsinghua Micro Ch16 021025

Tsinghua Micro Ch16 021025 - Chapter Sixteen Equilibrium...

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Unformatted text preview: Chapter Sixteen Equilibrium Market Equilibrium A market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers. 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. An Example D p a bp ( ) =- S p c dp ( ) = + At the equilibrium price p*, D(p*) = S(p*). That is, a bp c dp- = + * * which gives p a c b d * =- + and q D p S p ad bc b d * * * ( ) ( ) . = = = + + Market Equilibrium Can we calculate the market equilibrium using the inverse market demand and supply curves? Yes, it is the same calculation. Market Equilibrium q D p a bp p a q b D q = = - =- =- ( ) ( ), 1 q S p c dp p c q d S q = = + =- + =- ( ) ( ), 1 the equation of the inverse market demand curve. And the equation of the inverse market supply curve. Market Equilibrium Two special cases: quantity supplied is fixed, independent of the market price, and quantity supplied is extremely sensitive to the market price. Market Equilibrium S(p) = c+dp, so d=0 and S(p) c. p q q* = c D-1 (q) = (a-q)/b Market demand Market quantity supplied is fixed, independent of price. Market Equilibrium Market quantity supplied is extremely sensitive to price. S-1 (q) = p*. p q p* D-1 (q) = (a-q)/b Market demand Quantity Taxes A quantity tax levied at a rate of $t is a tax of $t paid on each unit traded. If the tax is levied on sellers then it is an excise tax . If the tax is levied on buyers then it is a sales tax . Quantity Taxes What is the effect of a quantity tax on a markets equilibrium? How are prices affected? How is the quantity traded affected? Who pays the tax? How are gains-to-trade altered? Quantity Taxes A tax rate t makes the price paid by buyers, p b , higher by t from the price received by sellers, p s . p p t b s- = Quantity Taxes Even with a tax the market must clear. I.e. quantity demanded by buyers at price p b must equal quantity supplied by sellers at price p s ....
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This note was uploaded on 12/06/2011 for the course BUSINESS MicroEco taught by Professor Luyu during the Spring '11 term at Tsinghua University.

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Tsinghua Micro Ch16 021025 - Chapter Sixteen Equilibrium...

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