Chapter Three
Market equilibrium
Equilibrium price: the price that equates the quantity demanded with the quantity supplied
Equilibrium quantity: the amount that people are willing to buy and sellers are willing to offer at the equilibrium price level
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 2
Chapter Three
Market equilibrium
Shortage: a market situation in which the quantity demanded exceeds the quantity supplied shortage occurs at a price below the equilibrium level Surplus: a market situation in which the quantity supplied exceeds the quantity demanded surplus occurs at a price above the equilibrium level
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 3
Chapter Three
Market equilibrium
Chapter Three
Comparative statics is a form of sensitivity (or what-if) analysis Commonly used method in economic analysis
Chapter Three
Process of comparative statics analysis: state all the assumptions needed to construct the model begin by assuming that the model is in equilibrium introduce a change in the model, so a condition of disequilibrium is created find the new point of equilibrium compare the new equilibrium point with the original one
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 6
Chapter Three
Chapter Three
Chapter Three
Chapter Three
Chapter Three
10
Chapter Three
11
sellers already in the market respond to a change in equilibrium price by adjusting variable inputs buyers already in the market respond to changes in equilibrium price by adjusting the quantity demanded for the good or service
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 12
Chapter Three
Short run changes show the rationing function of price The rationing function of price is the change in market price to eliminate the imbalance between quantities supplied and demanded is the change in market price to eliminate the imbalance between quantities supplied and demanded
Chapter Three
13
Short-run analysis
Chapter Three
14
Short-run analysis
Chapter Three
15
Short-run analysis
an increase in supply causes equilibrium price to fall and equilibrium quantity to rise
Chapter Three
16
Short-run analysis
a decrease in supply causes equilibrium price to rise and equilibrium quantity to fall
Chapter Three
17
The long run is the period of time in which: new sellers may enter a market existing sellers may exit from a market existing sellers may adjust fixed factors of production buyers may react to a change in equilibrium price by changing their tastes and preferences
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 18
Chapter Three
Long run changes show the allocating function of price The guiding or allocating function of price is the movement of resources into or out of markets in response to a change in the equilibrium price
Chapter Three
19
Long-run analysis
initial change: decrease in demand from D1 to D2 result: reduction in equilibrium price and quantity (to P2,Q2) follow-on adjustment: movement of resources out of the market leftward shift in the supply curve to S2
Chapter Three
20
Long-run analysis
initial change: increase in demand from D1 to D2 result: increase in equilibrium price and quantity (to P2,Q2) follow-on adjustment: movement of resources into the market rightward shift in the supply curve to S2
Chapter Three
21
in the extreme case, the forces of supply and demand are the sole determinants of the market price, not any single firm this type of market is perfect competition in many cases, individual firms can exert market power over price because of their: dominant size ability to differentiate their product through advertising, brand name, features, or services
Copyright 2009 Pearson Education, Inc. Publishing as Prentice Hall. 22
Chapter Three