Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 16 Equilibrium Part I (Equilibrium price (The equilibrium price…
Chapter 16
Equilibrium
Part I
Perfect Competition
the price-taker assumption about the firms
-> too small relative to the whole market to influence price, so takes price as given and just chooses how much to produce
the price-taker assumption about consumers
-> each consumer's demand is a small part of market demand and cannot influence market price, so each consumer tales price as given and just chooses how much to demand
No producer or consumer can influence price individually, but all of them together will determine the
equilibrium price
of the good
Equilibrium price
The equilibrium price is the price at which the market clears: when quantity demanded equals quantity supplied
At the
equilibrium price
p
,
S(p
)=D(p*)
The
equilibrium quantity
will be the quantity demanded and supplied at the equilibrium price
i.e., Q
=S(p
)=D(p*)
In a competitive equilibrium, it must also hold that
Pd(q)=Ps(q)
That is, the price received by consumers equals the price received by producers
Pareto efficiency
An allocation is
Pareto Efficient
if there is no way to make someone better off without making someone worse off
A Pareto allocation is not necessarily equitable or "fair"
Similarly, an equitable distribution is not necessarily Pareto efficient
Surplus
Besides Pareto efficiency, there is another way to evaluate the market allocation: what is the
total surplus
(consumer plus producer surplus) generated?
Does the market maximise the total surplus?
max CS+PS
FOC: p=mc, which is the price charged in a perfectly competitive market
Comparative statics: demand
Changes that may cause an outward shift in demand
Price of a substitute good goes up
Price of a complement good goes down
Income goes up
Preference changes
More consumers demand the good
Comparative statics: supply
Changes that may cause an outward shift in supply
Price of an input goes down
Technology improves (can make same output with fewer inputs)
More firms enter the market