Section 04 _Equilibrium_

Section 04 _Equilibrium_ - Equilibrium(Section 4 So far we...

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1 Equilibrium (Section 4) So far we have assumed that market prices (and quantity) were given when we made consumer and firm’s decisions o This is not quite right BUT o It is not quite right to do it the other way either Firms and consumers can’t make their decisions without knowing the equilibrium (price or quantity), but we don’t know the equilibrium (price and quantity) without consumers and firms making their decisions o So we look at the consumer’s(s’) [firm’s(s’)] decisions for all prices (or all quantities) square4 This is called a demand [supply] curve square4 This why math and functions are so important Price and quantity are jointly determined based on consumers’ and firms’ decisions. This notes may not be distributed or copied without the permission of David Welsch
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2 I. Definition of equilibrium A situation where no participant wants to change his/her behavior A situation where all consumers are maximizing utility and firms are maximizing profits and this will determine price and quantity Price where quantity supplied (number of units people want to sell at that price) is same as quantity demanded (number of units people want to buy at that price) A situation where agents are choosing the best possible action for themselves and each agent’s behavior is consistent with that of others o If price is different than equilibrium some agent’s behavior is infeasible thus there is reason for their behavior to change square4 Thus a non equilibrium price cannot persist since some agents will have the incentive to change their behavior.
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