VI Market Equilibrium and Price

8/8/2019 VI Market Equilibrium and Price

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Market Equilibrium

Price per unit of

hamburger

Quantity (millions) per day

S

1

5

10

3

4

D

Equilibrium

Market equilibrium: If sellers are free to sell their goods

at any price, trial and error will ensure that the price and

quantity combination that occurs will be an equilibrium


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D & S: A more formal treatment

The Demand side

Qd=f(P)

An example of a demand function is:

IfP = P0 then Qd= 100 IfP = P50 then Qd= 0

P = 50 is the choke price

PQd 2100


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Qd= 100 - 2P

The number (coefficient) -2 attached to the pricevariable, P, is the slope of the curve

This number shows how much the quantity of beefdemanded changes in response to a unit change in the priceof beef:

80)102(100,10 dQthenPIf

For every increase in P by a peso, Qdgoes down by 2 units

(= 2000 tons of beef).

78)112(100,11 dQthenPIf

The Demand Side


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The Supply Side

Qs=f(P)

An example of a supply function is:

IfQs = 0, then P = 20

P = 20 thus represents the vertical intercept for the

supply curve

PQs 5.010


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Qs = -10 + 0.5P

The number (coefficient) 0.5 attached to the price

variable, P, is the slope of the curve

This number shows how the quantity supplied changes in

response to a unit change in price

5)305.0(10,30 sQthenPIf5.5)315.0(10,31 sQthenPIf

If the price of beef rises by one unit the supply of beef

rises by 0.5 of a unit per day.

The Supply Side


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Finding the Market Equilibrium

Two equations: demand & supply

Qd= 100 - 2P & Qs = -10 + 0.5P

Two unknowns:price & quantity

Equilibrium condition: Qd= Qs

Therefore ..


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P5.2110

P

5.2

110

P44

)5.0(10)2(100 PP

Finding the Market Equilibrium


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Equilibrium price, p* per ton is 44

So: how do we get q*?

We have to substitute p*=44 either:in the demand function:

Qd= 100 - 2P Qd=100 - 2 x 44 Qd= 12

or in the supply function:

Qs = -10 + 0.5pQs=-10+0.5 x 44Qs=12

q*= 12 units, or 12,000 tons of beef per day


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The Market for Beef

Quantity (1000s tons) per day

Price per ton

50

100

20

10

30

40

S

D

44

12


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Exercises on the Demand Curve

Increase income

Decrease in income

Greater taste/preference

Less taste /preference

Increase in population

Greater speculation

Shift to the right

Shift to the left Shift to the right

Shift to the left

Shift to the right

Shift to the right


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Exercises on the Supply Curve

Increase # of sellers

Decrease # of sellers

Better technology

Increase in cost of prod

Decrease in cost of prod

Shift to the right

Shift to the left Shift to the right

Shift to the left

Shift to the right


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Some Comparative Static Analysis:

The effect of an income increase

Price per unit of

hamburger


S

1

5

10

3

4

D

A

D

5 6

B

C


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Price per unit of

hamburger


S

1

5

104

D

A

2.5

2

B

C

3

D

3


The effect of a health scare


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Price per unit of

hamburger


S

1

5

10

3

4

DA

S

B

C

32


The effect of an import ban


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Consumer & Producer Surplus

Price per litre

litres (millions) per day

S

p*

q*

D

A

Consumer

Surplus

Producer

SurplusE


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Markets in Action

Free markets allow prices to be determined by theforces of supply and demand

Price controls are government rules setting pricefloors or ceilings that forbid the adjustment ofprices to clear markets

Price controls will generally generate losses inconsumer surplus losses in welfare, and end upwith black markets


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Documents

VI Market Equilibrium and Price