Markets and Competitive Equilibrium. Lecture 5. In This Lecture. Market Equilibrium and the Forces Moving the Market Toward Equilibrium The Hypothesis of a Single Price Changes in Demand and Supply Case Study--Gasoline Prices Case Study--Scalping ND Football Tickets. Demand
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Given a price, how much will be demanded?
Given a quantity, what is the maximum amount would the demanders be willing to pay?
Given a price, how much will be supplied?
Given a quantity supplied, what is the minimum price per unit would be acceptable to the suppliers?
Is PH an Equilibrium Price?
DonutsDemand and Supply Review
Consequently, these suppliers who can’t sell at PH will offer their output at a slightly lower price -- have a sale.
The sale will take away purchases from competitors who will be forced to lower their prices to maintain sales
Price will fall!
DonutsToo High of a Price Results in Excess Supply
Consequently, supplies will sell out and still have customers wanting to buy product at PL.
Price will rise!
DonutsToo Low of a Price Results in Excess Demand
At this price, everyone’s wishes are being met -- no one has incentive or desire to do something different
If nothing else changed, we would expect the price and amount of donuts produced and sold to be constant over time
In a significant number of situations, individuals are charged different amounts for the same good (car purchases). Yet we would expect there to be a single price in a competitive market. Why?
IF everyone knew the rate (price) that others were trading, why would they every pay more than others were paying? Why would sellers accept less? If they did then the multiple prices could not be an equilibrium since they would want to do something else.
We are assuming perfect information on the part of buyers and sellers of the goods.
a. Demand considerations