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Ch_3_Eqm_ana_in_Econ

# Ch_3_Eqm_ana_in_Econ

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Published by: Prince Palash on Jun 18, 2012

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04/20/2015

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Chapter 3 Equilibrium analysis in Economics
3-1

Chapter 3Equilibrium Analysis in Economics---------------------------------------------------------------------

Studies or analysis of Economics
1.

Static Analysis

Studies focus only on a particular period of time.
2.

Comparative Analysis

Studies focus on the external forces that make equilibrium move to a newone.
3.

Dynamic Analysis

Studies focus on the change of time and how the equilibrium change withtime.Q
0
Q
1
PSDQ
P
0
Comparative Analysis
P
1
E
Static Analysis
PSDQ
P*Q*
E

Chapter 3 Equilibrium analysis in Economics
3-2

Dynamic AnalysisExample of dynamic analysis: Cobb-web Theorem
Variable
Converge
Time
Diverge
VariableTimeS
2

S
1

0321
PQPriceTimeP
t

P
1
P
2
P
3

DS
3
S
t
(P
t
-1)
P
2
P
Q
2
Q
1
P
1

QD
t
(Pt)S
t
(P
t
-1)
P
2

P
Q
2
Q
1
P
1

QD
t
(Pt)

Chapter 3 Equilibrium analysis in Economics
3-3

3.1

Partial Market Equilibrium - A linear model
Identify equilibrium price & equilibrium quantity (endogenous)
Constructing the model
1.

Equilibrium conditionConditional equation Q
d
= Q
s
2.

Demand equation: a decreasing linear function of P (P
, Q
d

)Behavioral equation Q
d
= a bP (a, b > 0)3.

Supply equation: an increasing linear function of P (P
, Q
s

)Behavioral equation Q
s
= -c + dP (c, d > 0)
Solution
Q
d
= a – bPQ
S
= -c + dPThe equilibrium conditionQ
d
= Q
s
a bP = -c + dPa + c = bP + dPa + c = (b + d)PP
*

=

a+c b+d
Q*
P
P
*
Q
d
= a - bPThe solution valuesare P
*
and Q
*
Q
s
= -c + dP
Q

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