lecture16 - Prof. Jay Bhattacharya Econ 11-Lecture 16...

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Prof. Jay Bhattacharya Econ 11--Lecture 16 Spring 2001 1 Spring 2001 Econ 11--Lecture 16 Partial Equilibrium Analysis • We have now analyzed the intricate workings of market supply and demand curves from the bottom up. • Today, we will put together these curves to predict the equilibrium price in one market (“partial” equilibrium) in the long and short run. • We will consider how government policies affect the welfare of market participants in this model. Spring 2001 Econ 11--Lecture 16 Equilibrium is the Intersection of Supply and Demand Curves Q P Market Demand Market Supply Spring 2001 Econ 11--Lecture 16 Price Setting • Prices are set by the interaction of all market participants • From the point of view of each market participant prices are fixed at the equilibrium level. – This is true as long as suppliers have no market power (perfect competition). • Prices will move toward equilibrium. – If prices are above equilibrium: supply expands, demand contracts. – If prices are below equilibrium: supply contracts, demand expands. Spring 2001 Econ 11--Lecture 16 Supply and Demand Elasticities • It is useful to have a measure of the responsiveness of supply and demand to price that is unitless—elasticity. • Definition: Supply elasticity • Definition: Demand elasticity S S P S Q P P Q e = = P in change % supplied Q in change % , D D P D Q P P Q e = = P in change % demanded Q in change % , Spring 2001 Econ 11--Lecture 16 Effect of Supply Shift P Q Inelastic Demand Elastic Demand P Q Spring 2001 Econ 11--Lecture 16 Effect of Demand Shift P Q Inelastic Supply Elastic Supply P Q
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Prof. Jay Bhattacharya Econ 11--Lecture 16 Spring 2001 2 Spring 2001 Econ 11--Lecture 16 Welfare Properties of Partial Equilibrium P Q Consumer Surplus Producer Surplus Spring 2001 Econ 11--Lecture 16 Comparative Statics of Equilibrium • Comparative statics is the study of how equilibrium changes when some exogenous event occurs. • Example: What happens to the price of Nikes if people start to boycott them? • Let the demand for Nikes be Q D =F( P ; a ) where a is a “sweatshop fad” parameter so that 0 < a Q D Spring 2001 Econ 11--Lecture 16 Comparative Statics (continued) • Let the supply of Nikes be Q S =G(P)
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lecture16 - Prof. Jay Bhattacharya Econ 11-Lecture 16...

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