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Market Equilibrium
Market Equilibrium
Price per unit of
hamburger
5
Equilibrium S
1
D
4 10 Quantity (millions) per day
Qd=f(P)
An example of a demand function is:
Qd 100 2 P
If P = P0 then Qd = 100
If P = P50 then Qd = 0
vertical
intercept Inverse relationship between
50 price and quantity
horizontal
intercept
100
Qs 10 0.5 P
If Qs = 0, then P = 20
If P 30 , then Qs 10 (0.5 30 ) 5
If P 31, then Qs 10 (0.5 31) 5.5
If the price of beef rises by one unit the supply of beef
rises by 0.5 of a unit per day.
Finding the Market Equilibrium
Therefore …..
Finding the Market Equilibrium
100 (2 P) 10 (0.5 P)
110 2.5 P
110
P
2.5
44 P
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 + 0.5p Qs=-10+0.5 x 44Qs=12
50
44
40
30
20
10 D
12 100
5 S
B
A C
3
1
D D‟
4 5 6 10 Quantity (millions) per day
Some Comparative Static Analysis:
The effect of a health scare
Price per unit of
hamburger
S
5
A
C
3
Quantity (millions) per day
2.5 B
1 D
D‟
2 3 4 10
Some Comparative Static Analysis:
The effect of an import ban
B
C
3 A
D
1
10
2 3 4 Quantity (millions) per day
Consumer & Producer Surplus
p* A
Producer E D
Surplus
q* litres (millions) per day
Markets in Action
A
i*
ic
excess of demand
D
q* (millions) per day
Markets in Action
Effect of a (high) Price Floor
An example: think of the market for sugar in Uruguay
The government sets a higher price floor than the equilibrium
Price per kilo excess of supply
S
pf
p*
D
qd q* qs kilos (millions) per day