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Ebook Microeconomics - A global text: Part 2

(BQ) Part 2 book "Microeconomics - A global text" has contents: Equilibrium in an isolated market, the perfectly competitive market, monopoly, monopolistic competition, oligopoly, alternative theories of the firm, the factor market, general equilibrium and welfare maximization, investment criteria. | www.downloadslide.com 8 Equilibrium in an Isolated Market Existence of Market Equilibrium; Uniqueness of Market Equilibrium; Stability of Market Equilibrium: Static Stability (Walrasian, Marshallian); Dynamic Stability; Significance of Dynamic Stability. In the earlier chapters, demand (consumer) and supply (producer) were treated separately. This chapter deals with the interaction between demand and supply in the market. The analysis is restricted to a single isolated market which means that there is no consideration of loops and feedbacks from one market to the other. The existence, uniqueness and stability of equilibrium are examined with stability being separated into its static and dynamic (time path) components. The aim is to identify the conditions under which markets clear (i.e. supply equals demand) and to use this information for policy, both for suppliers and consumers as well as for public policy makers. 8.1 EXISTENCE OF MARKET EQUILIBRIUM Equilibrium will exist if demand and supply have at least one point in common in the positive quadrant. In general, equilibrium in a single isolated market exists where supply equals demand. 8.1.1 Commodity market equilibrium In a perfectly competitive commodity market price can adjust to bring equilibrium where quantity demanded (QD ) is equal to quantity supplied (QS ) or where, at the equilibrium price, excess demand is zero: QD − Q S = 0 Typically, the demand slope is negative: QD = a − bP www.downloadslide.com C H A P T E R 8 EQUILIBRIUM IN AN ISOLATED MARKET whereas the supply slope is positive: QS = α + β P Typically, market equilibrium is considered in the Walrasian sense with quantity demanded being a function of price (as above). The Walrasian approach should be viewed as that of the auctioneer in which price bidding is used to clear the supply in the market. It should be remembered, however, that the demand and supply curves, as drawn, follow the Marshallian approach with price being a function of