Equilibrium

1. 16 Equilibrium

2. Market Equilibrium • A market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers.

3. Market Equilibrium Marketdemand p q=D(p) D(p)

4. Market Equilibrium Marketsupply p q=S(p) S(p)

5. Market Equilibrium Marketdemand Marketsupply p q=S(p) q=D(p) D(p), S(p)

6. Market Equilibrium Marketdemand Marketsupply p q=S(p) p* q=D(p) q* D(p), S(p)

7. Market Equilibrium Marketdemand Marketsupply p q=S(p) D(p*) = S(p*); the marketis in equilibrium. p* q=D(p) q* D(p), S(p)

8. Market Equilibrium Marketdemand Marketsupply p q=S(p) D(p’) < S(p’); an excessof quantity supplied overquantity demanded. p’ p* q=D(p) D(p’) S(p’) D(p), S(p)

9. Market Equilibrium Marketdemand Marketsupply p q=S(p) D(p’) < S(p’); an excessof quantity supplied overquantity demanded. p’ p* q=D(p) D(p’) S(p’) D(p), S(p) Market price must fall towards p*.

10. Market Equilibrium Marketdemand Marketsupply p q=S(p) D(p”) > S(p”); an excessof quantity demandedover quantity supplied. p* p” q=D(p) S(p”) D(p”) D(p), S(p)

11. Market Equilibrium Marketdemand Marketsupply p q=S(p) D(p”) > S(p”); an excessof quantity demandedover quantity supplied. p* p” q=D(p) S(p”) D(p”) D(p), S(p) Market price must rise towards p*.

12. Market Equilibrium • An example of calculating a market equilibrium when the market demand and supply curves are linear.

13. Market Equilibrium Marketdemand Marketsupply p S(p) = c+dp p* D(p) = a-bp q* D(p), S(p)

14. Market Equilibrium Marketdemand Marketsupply p S(p) = c+dp What are the valuesof p* and q*? p* D(p) = a-bp q* D(p), S(p)

15. Market Equilibrium At the equilibrium price p*, D(p*) = S(p*).

16. Market Equilibrium At the equilibrium price p*, D(p*) = S(p*).That is,

17. Market Equilibrium At the equilibrium price p*, D(p*) = S(p*).That is, which gives

18. Market Equilibrium At the equilibrium price p*, D(p*) = S(p*).That is, which gives and

19. Market Equilibrium Marketdemand Marketsupply p S(p) = c+dp D(p) = a-bp D(p), S(p)

20. Market Equilibrium • Can we calculate the market equilibrium using the inverse market demand and supply curves?

21. Market Equilibrium • Can we calculate the market equilibrium using the inverse market demand and supply curves? • Yes, it is the same calculation.

22. Market Equilibrium the equation of the inverse marketdemand curve. And the equation of the inverse marketsupply curve.

23. Market Equilibrium Marketinversedemand D-1(q),S-1(q) Market inverse supply S-1(q) = (-c+q)/d p* D-1(q) = (a-q)/b q* q

24. Market Equilibrium Marketdemand D-1(q),S-1(q) Market inverse supply S-1(q) = (-c+q)/d At equilibrium,D-1(q*) = S-1(q*). p* D-1(q) = (a-q)/b q* q

25. Market Equilibrium and At the equilibrium quantity q*, D-1(p*) = S-1(p*).

26. Market Equilibrium and At the equilibrium quantity q*, D-1(p*) = S-1(p*).That is,

27. Market Equilibrium and At the equilibrium quantity q*, D-1(p*) = S-1(p*).That is, which gives

28. Market Equilibrium and At the equilibrium quantity q*, D-1(p*) = S-1(p*).That is, which gives and

29. Market Equilibrium Marketdemand Marketsupply D-1(q),S-1(q) S-1(q) = (-c+q)/d D-1(q) = (a-q)/b q

30. Quantity Taxes • A quantity tax levied at a rate of $t is a tax of $t paid on each unit traded. • If the tax is levied on sellers then it is an excise tax. • If the tax is levied on buyers then it is a sales tax.

31. Quantity Taxes • What is the effect of a quantity tax on a market’s equilibrium? • How are prices affected? • How is the quantity traded affected? • Who pays the tax? • How are gains-to-trade altered?

32. Quantity Taxes • A tax rate t makes the price paid by buyers, pb, higher by t from the price received by sellers, ps.

33. Quantity Taxes • Even with a tax the market must clear. • I.e. quantity demanded by buyers at price pb must equal quantity supplied by sellers at price ps.

34. Quantity Taxes and describe the market’s equilibrium.Notice these conditions apply nomatter if the tax is levied on sellers or onbuyers.

35. Quantity Taxes and describe the market’s equilibrium.Notice that these two conditions apply nomatter if the tax is levied on sellers or onbuyers. Hence, a sales tax rate $t has thesame effect as an excise tax rate $t.

36. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p No tax p* q* D(p), S(p)

37. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An excise tax raises the marketsupply curve by $t $t p* q* D(p), S(p)

38. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An excise tax raises the marketsupply curve by $t,raises the buyers’price and lowers thequantity traded. $t pb p* qt q* D(p), S(p)

39. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An excise tax raises the marketsupply curve by $t,raises the buyers’price and lowers thequantity traded. $t pb p* ps qt q* D(p), S(p) And sellers receive only ps = pb - t.

40. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p No tax p* q* D(p), S(p)

41. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An sales tax lowersthe market demandcurve by $t p* $t q* D(p), S(p)

42. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An sales tax lowersthe market demandcurve by $t, lowersthe sellers’ price andreduces the quantitytraded. p* ps $t qt q* D(p), S(p)

43. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p An sales tax lowersthe market demandcurve by $t, lowersthe sellers’ price andreduces the quantitytraded. pb pb pb p* ps $t qt q* D(p), S(p) And buyers pay pb = ps + t.

44. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p A sales tax levied atrate $t has the sameeffects on themarket’s equilibriumas does an excise taxlevied at rate $t. $t pb pb pb p* ps $t qt q* D(p), S(p)

45. Quantity Taxes & Market Equilibrium • Who pays the tax of $t per unit traded? • The division of the $t between buyers and sellers is the incidence of the tax.

46. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p pb pb pb p* ps qt q* D(p), S(p)

47. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p Tax paid by buyers pb pb pb p* ps qt q* D(p), S(p)

48. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p pb pb pb p* Tax paid by sellers ps qt q* D(p), S(p)

49. Quantity Taxes & Market Equilibrium Marketdemand Marketsupply p Tax paid by buyers pb pb pb p* Tax paid by sellers ps qt q* D(p), S(p)

50. Tax Incidence and Own-Price Elasticities • The incidence of a quantity tax depends upon the own-price elasticities of demand and supply.