ECON 1B03 Lecture Notes - Lecture 3: Market Clearing, Economic Equilibrium, Demand Curve

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21 May 2018

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Market Equilibrium

- Equilibrium: is a situation in which there is no incentive for any individual to change what

they’re doig eause they a’t ake theselves ay etter off

- in the market, this happens when Qd=Qs

- The price is such that no buyers want to buy any more at that price and no sellers want to sell

anymore at that price

- No one goes without and no one has any extra: the market clears

- The price at which Qd=Qs is the equilibrium price, also called the market clearing price

- The quantity at which Qd=Qs is the equilibrium quantity

- It is the quantity traded in the market (the quantity that is actually sold)

Lets Find equilibrium for our candy bar market:

- Equilibrium occurs where the two curves intersect

Analyzing Market Equilibrium

Suppose that for some reason, the market price of candy bars was $2.50

- At $2.50, consumers will only buy 5 bars, but firms will offer 25 bars for sale

- There will be a surplus, or excess supply at a price above equilibrium prices where Qs>Qd

- Firms will want to decrease inventory by lowering Price

- As the price decreases consumers purchase more of the good

- Eventually we return to equilibrium price where Qd=Qs with no further pressures on price

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ECON 1B03 Full Course Notes

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Equilibrium: is a situation in which there is no incentive for any individual to change what they"re doi(cid:374)g (cid:271)e(cid:272)ause they (cid:272)a(cid:374)"t (cid:373)ake the(cid:373)selves a(cid:374)y (cid:271)etter off in the market, this happens when qd=qs. The price is such that no buyers want to buy any more at that price and no sellers want to sell anymore at that price. No one goes without and no one has any extra: the market clears. The price at which qd=qs is the equilibrium price, also called the market clearing price. The quantity at which qd=qs is the equilibrium quantity. It is the quantity traded in the market (the quantity that is actually sold) Lets find equilibrium for our candy bar market: Suppose that for some reason, the market price of candy bars was . 50. There will be a surplus, or excess supply at a price above equilibrium prices where qs>qd. Firms will want to decrease inventory by lowering price.

Related Questions

The wheat market is perfectly competitive, and the market supply and demand curves are given by the following equations:

QD=20,000,000-4,000,000P

QS=7,000,000+2,500,000P, where QD and QS are quantity demanded and quantity supplied measured in bushels, and P=price per bushel.

a.) Determine consumer surplus at the equilibrium price and quantity.

b.) Assume that the government has imposed a price floor at $2.25 per bushel and agrees to buy any resulting excess supply. How many bushels of wheat will the government be forced to buy? Determine consumer surplus with the price floor.

taupegerbil480

The daily demand for travel at a small regional airport is initially QD = 1000 - p; where quantity is in passengers and price is in dollars per passenger. There are initially 10 price-taking firms serving this market and each of them has the production function: q = sqrt (lk) where q is in passengers, and labor and capital are in some appropriately specified units. The price of a unit of labor is w = 100 per day; the price of a unit of capital is v = 100 per day, and this industry has constant costs. Each firm initially has a capital stock of k0 = 80. day; and this industry has constant costs. Each firm initially has a capital stock of k0 = 80.

(a) Derive the short-run cost function, SC(q), for each firm in the market.

(b) Derive the short-run market supply function, QS.

(c) Find the short-run competitive equilibrium price, p*, and quantity, Q*. How much labor, L*, does the industry employ at the competitive equilibrium?

(d) Derive the long-run cost function, C(q), of each firm in the industry.

(e) Describe the long-run market supply curve. Does the short-run competitive equilibrium at (Q*; p*) also correspond to a long-run competitive equilibrium? Explain why or why not.

Now, imagine that a catastrophic event causes the daily demand for air travel in this market to fall unexpectedly to ~QD = 750 - p Continue to assume that each of the 10 firms has a capital of k0 = 80 in the short run.

(f) Find the new short-run competitive equilibrium price, p**, and quantity, Q**, in this market. How much labor, L**, does the industry employ in the new short-run competitive equilibrium?

(g) What is the new long-run competitive equilibrium price, p***, and quantity, Q***? Describe what must happen as the industry moves from the short-run competitive equilibrium at (Q**; p**) to the long-run competitive equilibrium at (Q***; p***). How much labor L*** does the industry employ at the new long-run equilibrium?

bronzeporpoise178

There is a market for polio vaccines. Demand is given by Qd=180 -4Pd, where Pd is the price of the vaccine paid by consumers and Qd is the number of vaccines consumed divided by ten million. The supply of vaccines is given by Qs=2Ps-60 with Ps and Qs being the price received by suppliers and the number of vaccines supplied divided by ten million.

1) Calculate equilibrium algebraically.

2) Define the term externality and discuss why the government may want to subsidize vaccinations.

3) Assume that the government gives consumers a subsidy for each vaccine that they consume. What happens to the demand curve? To the supply curve? Does the equilibrium quantity go up or down? Does the price that producers receive go up or down? By more or less than the amount of the subsidy?

4) Now assume that the government gives a subsidy to each producer for each vaccine that gets produced. What happens to the demand curve? To the supply curve? Does the equilibrium quantity go up or down? Does the net price that consumers pay go up or down? By more or less than the amount of the subsidy?

5) Instead, suppose that the government wants producers to make more vaccines and implements a price floor: consumers must pay at least $42 for the vaccine. Is there an equilibrium in this market? How many vaccines are produced? How many are consumed?

6) Lastly, the government wants more people to become vaccinated, so it implements a price ceiling: consumers will pay at most $36 for the vaccine. Is there an equilibrium in this market? How many vaccines are produced? How many are consumed? Who will get vaccinated?

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ECON 1B03 Lecture Notes - Lecture 3: Market Clearing, Economic Equilibrium, Demand Curve

ECON 1B03 Full Course Notes

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