1. Principles of Microeconomics Shomu Banerjee
3. Competitive markets
Emory University
Spring 2013

2. Competitive markets
No single person believes that s/he can influence the market price
Potential buyers:
Potential sellers:
Everyone is a price-taker

3. Other assumptions Standardized (homogeneous) product
Relatively short time period
Specific geographical area
Information is available instantaneously and costlessly

4. Demand curve Maximum willingness to pay Ali: $8 Bob: $7 Carl: $6
Price
Maximum willingness to pay
Ali: $8
Bob: $7
Carl: $6
Don: $5
Eli: $4
Flo: $3
Gigi: $2 10 5 5 10
Quantity

5. Supply curve Minimum willing to accept Hal: $3 Ila: $3 Jon: $4 Kay: $5
Price
Minimum willing to accept
Hal: $3
Ila: $3
Jon: $4
Kay: $5
Lee: $6
Matt: $6
Nell: $7 10 5 5 10
Quantity

6. Market Equilibrium
Price
A price P* is an equilibrium price if the quantity demanded at that price equals the quantity supplied at that price; this quantity Q* is the equilibrium quantity.
Quantity 5 10 4 E F G L M N

7. Gains from trade • Consumer surplus: • Producer surplus: Price 10 A B5 K J H I 4 5 10
Quantity

8. Market Equilibrium GFT
Price A 1 10 5 2 4 3 6 7 8 9
A - G = 8 B - H = 6 C - I = 4 D - J = 2 E - K = 0 B C D E L K F J I H G
GFT = 20
Quantity

9. Market Equilibrium GFT
Price
Value to society from 5 trades A 1 10 5 2 4 3 6 7 8 9 B C D
A + B + C + D + E
-(G + H + I + J + K) E L K F J I H
“Cost” to society from 5 trades G
GFT = 20
Quantity

10. Market Matching GFT GFT = 18! A + B + C + D + E + F
Price
Value to society from 6 trades = 45 A 1 10 5 2 4 3 6 7 8 9 B C D
A + B + C + D + E + F
-(G + H + I + J + K + L) E L K F J I H
“Cost” to society from 6 trades = 37 G
GFT = 18!
Quantity

11. Market Equilibrium Price A “Cost” to society of 6th trade 1 10 5 2 4 35 2 4 3 6 7 8 9 B C D E L K F J
Value to society of 6th trade I H G
Quantity

12. Stability Price 10 5 • At $7: • At $3: 4 5 10 Quantity Excess supply
Excess demand
• At $3: 4 5 10
Quantity

13. Determinants of demand
Price
Income
Prices of other goods
Tastes
Price expectations
# of consumers 5
Price 10
Fixed
• Income
• Prices of other goods
• Tastes
• Price expectations
• Number of consumers
Initial demand 5 10
Quantity

14. Income +: Normal good –: Inferior good 5 Price 10 5 Price 10 5 10 5 10
New demand
with higher income B’ B B B’
Initial demand
New demand
with higher income
Initial demand 5 10 5 10
Quantity
Quantity

15. with higher price of complement
Prices of other goods
+: Substitute
–: Complement 5
Price 10 5
Price 10 A’ A A A’
New demand
with higher price
of substitute B’ B B B’
Initial demand
New demand
with higher price of complement
Initial demand 5 10 5 10
Quantity
Quantity

16. with increase in tastes
Price 10 A’ A
New demand
with increase in tastes 5 B’ B
Initial demand 5 10
Quantity

17. Increase in demand determinants
Income +/–
Price of substitutes +
Price of complements –
Tastes +
Price expectations +
# of consumers +
Change in demand = Shift in demand

18. Determinants of supply
Price
Input prices
Prices of other goods
Technology
Price expectations
# of producers 5
Price 10
Initial supply
Fixed
• Input prices
• Prices of other goods
• Technology
• Price expectations
• Number of producers 5 10
Quantity

19. with increase in input prices
New supply
with increase in input prices 10 A’ A 5 B’ B
Initial supply 5 10
Quantity

20. Increase in supply determinants
Input prices –
Technology +
Price expectations +
# of producers +
Prices of related goods +/–