MGEA02H3 Lecture Notes - Lecture 13: Invisible Hand, Demand Curve, Economic Equilibrium

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MGEA02 – Lecture 13 Perfect Competition
When there is a positive shock to the demand curve the market reallocates its resources as if
by an invisible hand (Adam Smith)
Competitions acts as an invisible hand to serve the common good even though ech firm is
serving their own interests
Below is the result of a positive shock to the demand curve in PC.
The top two diagrams represent the original equilibrium for each firm and the industry.
The bottom two show the result of a positive shock to the demand curve, showing the new
equilibrium price and quantity, and profit (filled in with cream).
In the third row it shows the result of a negative shock on the demand curve, resulting in a
loss to each firm
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