Download Lecture 5 The Market Equilibrium

Lecture 5
The Market Equilibrium
■ Market demand and supply
■ Reconciling suppliers and demanders
■ Equilibrium
Market demand and supply
Going from the individual to the market
■ We combine the demands of individuals by
adding them horizontally
■ We also combine the supplies of firms by
adding them horizontally
■ The results are market demand and supply
curves
Adding up demand curves
At each price, sum the individual quantities
demanded to get market quantity demanded
+
Da
=
Db
Dm = Da + Db
Adding up supply curves
At each price, sum the individual quantities supplied
to get market quantity supplied
Sb
Sa
+
Sm = Sa + Sb
=
Competition
■ Demanders compete with each other
►Their efforts tend to push price up, enriching suppliers
■ Suppliers compete with each other
► Their efforts tend to push price down, enriching demanders
■ Demanders do NOT compete with suppliers, even thought it
sometimes seems that way!
► What about bargaining? Each party tries to convince the
other of the powerful competition faced from alternatives
Equilibrium: The result of competition is
mutually beneficial cooperation.
At “equilibrium” no one has an incentive to change behavior:
$
S
P*
D
Q*
Q/time period
Adjustments to equilibrium
■ Price above P*
► Quantity supplied exceeds quantity demanded: excess supply, or
“surplus”
► Frustrated suppliers compete for business, lowering prices
(“buyers’ market”)
► Price falls until market clears
■ Price below P*
► Quantity demanded exceeds quantity supplied: excess demand,
or “shortage”
► Frustrated demanders compete for product, raising prices
(“sellers’ market”)
► Price rises until market clears
Adjustment process
What if the price is NOT right?
■Competition pushes price toward equilibrium
One more time…
The result of competition is mutually beneficial
cooperation

In equilibrium, price and quantity will persist, until and unless
there is a change in ceteris paribus conditions…
Question on Market
Equilibrium

Suppose Toyota currently sells 100,000
cars each year in Hawaii. Does that
mean there are 100,000 demanders of
Toyotas in Hawaii?
Question on Market
Equilibrium

Suppose the government of Hawaii
imposes a 100% sales tax on new
Toyotas. What will happen to price and
quantity of Toyotas sold in Hawaii?
Questions

How do each of these events influence
the equilibrium
(i) price of airline tickets and
(ii) quantity of airline trips taken
1. Rise in price of jet fuel
2. Depression in the economy
3. Threat of war
4. Government regulations making air
travel safer
Questions
True/false/uncertain:
 An increase in the sales tax on a good
will be paid for by consumers of the
good.
 It is important to producers of tires
whether a tax on tires is paid by them
or paid by consumers.