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Micro Econ Chapter 8 Slides
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Demand curve Demand curve = total quantity eN that all consumers together want to buy at any given price. E 7 - * Represents the willingness to i ; N pay (WTP) of buyers. orn Example: Secondhand textbook oF eS ‘Quantity of books @ (number of buyers) market. Scanned with CamScannerSupply curve Supply curve = total quantity that all firms together would produce at any given price. * Represents the willingness to accept (WTA) of sellers. * Sellers may have different uni ook unter oe) reservation prices. Price (eller reservation prices) (5) Scanned with CamScannerEquilibrium price At the equilibrium (market-clearing) price, supply equals demand. Any other price is not a Nash equilibrium e.g. if price was above P*, then there would be excess supply, so some sellers could benefit from charging a lower price. Assumes the products are identical, so buyers would be willing to buy from any seller. Price, POS) ‘Quantity of books, @ Scanned with CamScanner ‘areacalPrice-taking firms Price-taking firms cannot benefit from choosing a different price from the market price, and cannot influence the market price. * Demand curve (feasible set) is completely flat * Maximize profits when MC=P (slope of isoprofit = 0) * Firm’s supply curve = MC curve Firm chooses quantity, not price °> ® ® @ % wo i 1% alo im io Quanity of aves @ OO Scanned with CamScannerPrice-taking firms: Market supply curve ANS ee Plereont 0m 8 am 160 200 ‘0 2600" 4000 "6900" 8000 "2000 ‘quantity oftoaves.@ ati otoaves,@ Market supply curve — the total amount produced by all firms at each price. If firms have identical cost functions, market supply curve = market marginal cost curve. avearnt Scanned with CamScannerCompetitive equilibrium Competitive equilibrium: * All buyers and sellers are price-takers * Atthe prevailing market price, supply = demand Price, P(e) © 1000 2010 3000 4000 S000 «00 7800 800 9800 10000 ‘quantity ottoaves,@ Scanned with CamScannerCompetitive equilibrium: Characteristics All gains from trade are exploited in equilibrium (no deadweight loss). Equilibrium allocation is Pareto efficient, assuming: * Participants are price-takers. * Contracts are complete. * Transaction only affects buyers and sellers (no external effects) icareecal Scanned with CamScannerCompetitive equilibrium: Caveats * Allocation may not be Pareto efficient if assumptions do not hold.» * Fairness: The distribution of total; surplus depends on the elasticities of demand and supply (share of total surplus inversely related to wl elasticity) * Hard to find price-takers in real life. ‘Quantity ftoaves @ | lenveern Scanned with CamScannerChanges in supply and demand The entire supply or demand curve can shift due to exogenous shocks e.g. technological change, popularity Buyers and sellers adjust their behaviour so that the market clears. E.g. Improved baking technology 1. Supply of bread increases at every price (supply curve shifts) 2. Excess supply at the going market price (move along demand curve) 3. Price falls to a new equilibrium Price, () ‘Quantity oftoaves 0 areacat Scanned with CamScannerMarket Entry The supply curve can also shift due to market entry/exit. © toto 2000 3000 4000 S60
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