Understanding Competitive Markets and Equilibrium

Sep 17, 2024

Lecture Notes: Competitive Markets and Equilibrium

Introduction

  • Continuation from last week’s discussion on supply and demand.
  • Focus on equilibrium and competitive markets.
  • Supplementary notes available on Canvas.

Competitive Markets

  • Definition: Markets with many buyers and sellers.
  • Example: Lobster market.
    • Buyers and sellers are price takers.
    • They make decisions with the market price as given.
  • Non-Competitive Market Example: Monopoly.
    • Single producer influencing the market price.

Market Equilibrium

  • Equilibrium Concept:
    • Market price where quantity demanded equals quantity supplied.
    • Graphically represented by the intersection of supply and demand curves.
    • Equilibrium price (P*) and Equilibrium quantity (Q*).
  • Graphical and Tabular Analysis:
    • Demand curve: downward sloping.
    • Supply curve: upward sloping.
    • Find equilibrium at intersection.
    • Example with lobster market (equilibrium price = $15, equilibrium quantity = 600).

Surplus: Consumer and Producer

  • Consumer Surplus:
    • Area below demand curve and above price.
    • Calculated as: $\frac{1}{2} \times \text{(height)} \times \text{(width)}$.
  • Producer Surplus:
    • Area above supply curve and below price.
    • Calculated similarly to consumer surplus.
  • Total Surplus:
    • Sum of consumer and producer surplus.
    • Reflects aggregate happiness/efficiency in the market.

Efficiency in Competitive Markets

  • Competitive markets maximize total surplus.
  • Buyers with highest willingness pay, and sellers with lowest cost, complete transactions.
  • Natural efficiency result from optimal individual decisions.

Shifts in Supply and Demand

  • Example A: Increase in the price of steak.

    • Steak and lobster are substitutes.
    • Increase in steak price shifts demand for lobster outward.
    • Results: increase in equilibrium price and quantity for lobster.

  • Example B: Decrease in fuel price used to catch lobster.

    • Fuel is an input in lobster supply.
    • Decrease in fuel price shifts supply outward.
    • Results: decrease in equilibrium price, increase in equilibrium quantity for lobster.

Conclusion

  • Future videos will cover more examples of equilibrium shifts.
  • Analysis of supply and demand shocks and their impact on equilibrium.