Economics

Market Equilibrium

Dept. of Economics @ NCKU

Weng, Ming-Hung
Question(*)
Why are brown eggs
more expensive than
white eggs?
1. Healthier
2. More difficult to
raise those brown
egg layers
Outline
Competitive Market
Market Equilibrium
Determinants of Demand
Determinants of Supply
Comparative Statics: Comparison and changes in Market Eq.
 Market
Not by place By commodity
 Market Price
The market price is the price at which buyers and sellers
conduct transactions.

Price Takers
Price searchers

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 Competitive Market
A market with Buyers and sellers in a
Identical products competitive market are
Many buyers both price takers.
Many sellers Competitive buyers
Free entry/exit Price-taking firms
Full information
Are most markets
competitive?
Why do we study
competitive markets?
Identical products?
Many buyers?
Many sellers?
Free entry/exit?
Full information?
 Competitive Market(*)
A market with
Identical products
Many buyers
Many sellers
Free entry/exit
Full information

Is the market of s
shaved ice with Adzuki
bean, ors mango
ice competitive?
1. Yes
2. No
Market Equilibrium
Market for Ordinary Shaved ice with
Adzuki bean and condensed milk
Willingness to pay (buyers)
The highest possible price you are willing and
able to buy
Why is it limited?
Difference across individuals?
Willingness to accept (sellers)
The lowest possible price you are willing and
able to sell (costs?)
How much would you have to be paid to do 10
push-ups in front of class?
Agents are willing to trade when its
likely to realize any benefit
Market Equilibrium(*)
Shaved ice with Adzuki bean and
condensed milk
If your ID is
25; you are a potential buyer and your
ID is your Willingness to pay
26; you are a potential seller and your
ID is your Willingness to accept
If price= 25.5, you will
1. Buy (if youre buyer)
2. Not buy (if youre buyer)
3. Sell (if youre seller)
4. Not sell (if youre seller)
 Reality check
Why do expensive private schools only exist in
metropolitan areas?
Market Equilibrium(*)
Shaved ice with Adzuki bean and
condensed milk
If your ID is
26; you are a potential buyer and your
ID is your Willingness to pay
25; you are a potential seller and your
ID is your Willingness to accept
If price= 40.5, you will
1. Buy (if youre buyer)
2. Not buy (if youre buyer)
3. Sell (if youre seller)
4. Not sell (if youre seller)
 Surplus in a competitive market
Surplus or excess supply
Is everyone optimizing?
Sellers with WTA of $5?
Buyers with WTP of $45?
How will price adjust?
What if it cannot adjust?
Stock price
Auction of
lands/properties
Market Equilibrium (*)
Shaved ice with Adzuki bean and
condensed milk
If your ID is
26; you are a potential buyer and your
ID is your Willingness to pay
25; you are a potential seller and your
ID is your Willingness to accept
If price= 19.5, you will
1. Buy (if youre buyer)
2. Not buy (if youre buyer)
3. Sell (if youre seller)
4. Not sell (if youre seller)
 Shortage in a competitive market
Shortage or excess demand
Is everyone optimizing?
Sellers with WTA of $5?
Buyers with WTP of $45?
How will price adjust if
possible?
What if it cannot adjust?
 Examples in Venezuela
While most advanced economies struggle to lift inflation,
none would want Venezuelas situation: Consumer-price
inflation is forecast to hit 480% this year and top 1,640% in
2017, according to the International Monetary Fund.
A shortage of medical supplies means infants and other sick
patients are dying of treatable illnesses. Soldiers guard empty
grocery store shelves. Inflation is so bad, the government has
had to order bolivars by the planeload.
WSJ (Jul 18, 2016)
 Market equilibrium
Market price automatically adjusts the
imbalance between the supply and demand in
competitive markets
Equilibrium price is the price where the
quantity demanded meets quantity supplied.
Everyone (either buyer or seller) is optimizing
given the equilibrium price.
When prices are not adjustable
 Demand(*)
Demand describes what
P
buyers are willing and Demand (Curve)
able to do at different
prices. 40
Now everyone is buyer
and your ID represents
your willingness to pay 20
for the ice
*If price= 40.5, you will
1. Buy
Q1 Q2 Q
2. Not buy
 Demand(*)
Now everyone is buyer
P
and your ID represents Demand (Curve)
your willingness to pay
for the ice 40

*If price= 19.5, you will

1. Buy 20
2. Not buy

Q1 Q2 Q
 Demand
Other things being
P
equal, as price goes Demand (Curve)
down, quantity
demanded goes up; vice P1
versa.
The law of demand P2
Why would it hold?

Q1 Q2 Q
4 What Would Happen If the Government Tried to Dictate the Price of
Gasoline

Evidence-Based Economics Example:

Is the slope of
demand curve
negative?
How much more
gasoline would
people buy if its
price were lower?
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4 What Would Happen If the Government Tried to Dictate the Price of
Gasoline

Exhibit 4.5 The Quantity of Gasoline Demanded (per person) and the Price of
Gasoline in Brazil, Mexico, and Venezuela

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Determinants (Factors) of demand
Determinants (Factors)
of demand other than P Demand
its own price
Number of consumers P1
Preference or tastes
Income of consumers
Beliefs about future P2
Prices of related Demand
products
Substitutes
complements Q1 Q2 Q
 Number of consumers
Individual demands of
P
two classes (A/B) Demand (B)
the market (total) Demand (Market)
demand of two classes P1

The quantity demanded

by all buyers at each
P2
price (adding quantities
demanded horizontally)
Market demand is flatter Demand (A)
than individual demands Q1A Q1B Q1 Q
 Number of consumers
Other things being
P
equal, the demand for Demand (B)
rice in China will be ___ Demand (Market)
compared to that in P1
Taiwan.
1. Bigger
P2
2. Smaller
3. the same as
Demand (A)
Q1A Q1B Q1 Q
 Preference or tastes(*)
Now everyone is buyer
P
and your ID+5 Demand (Curve)
represents your
willingness to pay for 40
the ice after a
successful Ad
20
*If price= 40.5/19.5,
you will
1. Buy
Q1 Q2 Q
2. Not buy
Determinants (Factors) of demand
Determinants (Factors) of
demand causing shifts in P Demand (after)
demand
Number of consumers
P1
Preference or tastes

Shift (increase or
P2
decrease) in demand vs.
movement along the Demand (before)
demand curve (caused by
change in its own price)
Q1 Q2 Q