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ECON 1901 (44)
Chapter 4


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ECON 1901
Nathan Blascak

Chapter 4 I.Equilibrium and the Adjustment Process • surplus-an excess supply • competition will push prices down whenever there is a surplus -quantity demanded will increase and quantity supplied will decrease • shortage- excess demand • competition will push up prices whenever there is a shortage -quantity supplied increases and quantity demanded decreases • the equilibrium price is stable because at the equilibrium price the quantity demanded =quantity supplied -since every buyer can buy as much as he/she wants at equilibrium price, there is no incentive to push prices up -since every seller could sell a much as they want at equilibrium price, there is no incentive to push prices down A.Who Competes With Whom? 1.sellers compete with other sellers 2.buyers compete with other buyers a.other buyers “outbid”, thus, raising prices II.Gains from Trade Are Maximized at the Equilibrium Price and Quantity • there are benefits in trading as long as buyers will pay more than sellers are willing to accept -there are unexploited gains from trading at any quantity less than equilibrium quantity • gains from trade push the quantity towards equilibrium • at equilibrium there are no wasted resources • resources are wasted when they exceed the equilibrium quantity • a free market maximizes gains from trade • a free market maximizes producer surplus and consumer surplus -producer plus consumer plus are maximized at equilibrium price and quantity • to maximize trade goods should be at lowest possible price and satisfy highest possible demand -buyers have higher willingness to pay th
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