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    Aazmeer Rahman
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    micro econ chapter 8 slides

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    10 views17 pages

    Micro Econ Chapter 8 Slides

    Uploaded by

    Aazmeer Rahman

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 17
    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 CamScanner Supply 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 CamScanner Equilibrium 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 ‘areacal Price-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 CamScanner Price-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 CamScanner Competitive 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 CamScanner Competitive 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 CamScanner Competitive 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 CamScanner Changes 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 CamScanner Market Entry The supply curve can also shift due to market entry/exit. © toto 2000 3000 4000 S60

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