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**Unformatted text preview: **1 The Linear Supply and Demand Model The model is given by these demand and supply functions: = = + where are positive constants. and represent the sensitivity of quantity demanded and quantity supplied , respectively, to price . captures all factors besides price that a f ect quantity demanded, and captures all factors besides price that a f ect quantity supplied. In any model, we can divide the variables into two categories. Endogenous variables are those that were building the model to predict; theyre the outputs of the model. (The term means "generated from within [the model].") In the supply and demand model, the endogenous variables are: , , and . Exogenous variables are those that we take as given and constant; theyre the inputs to the model. (The term means "generated from outside [the model].") In the linear supply and demand model, the exogenous variables are: , , , and . 1.1 Equilibrium The system is in equilibrium when quantity demanded equals quantity sup- plied. We denote this equilibrium quantity by , and the equilibrium price that brings about this quantity demanded and quantity supplied by . By de f nition, solves: =...

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