Lecture 5-Equilibrium in Competitive Markets

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1 Aug 2010
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Tuesday, September 29, 2009.
Equilibrium in Competitive Markets
1. The equilibrium price occurs where quantity demanded is equal to quantity
supplied
2. 6KLIWVLQHLWKHUWKHGHPDQGFXUYHRUWKHVXSSO\FXUYH³DFKDQJHLQHLWKHUGHPDQG
RUVXSSO\´RUERWKwill alter the equilibrium price
Market Equilibrium
Price Quantity Demanded Quantity Supplied
5 5 6
4 3 5
3 4 4
2 6 3
1 9 0
Equilibrium Price
P = 3 QD = QS = 4
Any Other Price: market forces will change
1) P = 4 QD = 3 QS = 5
QD < QS Æ surplus Æ price falls
2) P = 2 QD = 6 QS = 3
QD > QS Æ shortage Æ price rises
To Determine How an Event Will Affect a Market
1. Decide whether event affects supply or demand
2. Decide direction of shift
3. Use supply and demand to identify change in equilibrium
Examples:
(1) Unusually warm winter in North America and the price of hotel rooms in Caribbean
resorts:
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Substitutes ³LQVWHDGRI´
Example: tea and coffee
Complements ³WRJHWKH
Example: coffee and cream
(2) If there is a boom coffee crop in Brazil, what happens to the price of tea?
(Coffee and tea are substitutes)
What happens to the price of textbooks?
(Coffee and textbooks are neither substitutes nor complements)
Æ SS shift to the right; move along in DD curve, no shift
(quantity demand increases due to increase in supplied)
SS
Q
P
DD
DD1
120
80
70
90
Å
Hotel Rooms
SS1
Q
P
DD
SS
P
P1
Q
Q1
Æ
Coffee
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Document Summary

Equilibrium in competitive markets: the equilibrium price occurs where quantity demanded is equal to quantity supplied, $1983090790/02,3/. :7;047908:55. Qd = qs = 4: p = 4. Qd < qs surplus price falls. Qd > qs shortage price rises. To determine how an event will affect a market: decide whether event affects supply or demand, decide direction of shift, use supply and demand to identify change in equilibrium. Examples: (1) unusually warm winter in north america and the price of hotel rooms in caribbean resorts: www. notesolution. com. Complements 940907 (2) if there is a boom coffee crop in brazil, what happens to the price of tea? (coffee and tea are substitutes) What happens to the price of textbooks? (coffee and textbooks are neither substitutes nor complements) ss shift to the right; move along in dd curve, no shift (quantity demand increases due to increase in supplied) www. notesolution. com. Price of coffee (falls) demand for tea (substitute good) falls.

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