The document discusses market equilibrium under perfect competition. It defines key concepts like market supply, demand, producer surplus, consumer surplus, total economic surplus. It explains how the market supply curve is built by summing individual firm supply curves. It also discusses how markets adjust towards equilibrium through the cobweb theory and how demand and supply shifts as well as changes in input costs can impact the market equilibrium price and quantity from the perspective of individual firms.

1. Market Equilibrium and Market Demand: Perfect Competition Chapter 8

3. Page 131 P=MR=AR Remember the firm’s supply curve?

4. Page 131 Firm’s supply curve starts at shut down level of output P=MR=AR

5. Page 131 Profit maximizing firm will desire to produce where MC=MR P=MR=AR

6. Page 131 Economic losses will occur beyond output O MAX , where MC > MR P=MR=AR

7. Market supply curve can be thought of as the horizontal summation of the supply decisions of all firms in the market. Here, at a price of $1.50, Gary would supply 2 tons of broccoli and Ima would supply 1 ton, giving a market supply of 3 tons. Page 132 Building the Market Supply Curve

8. Market supply curve can be thought of as the horizontal summation of the supply decisions of all firms in the market. Here, at a price of $1.50, Gary would supply 2 tons of broccoli and Ima would supply 1 ton, giving a market supply of 3 tons. + Page 132 Building the Market Supply Curve

9. Market supply curve can be thought of as the horizontal summation of the supply decisions of all firms in the market. Here, at a price of $1.50, Gary would supply 2 tons of broccoli and Ima would supply 1 ton, giving a market supply of 3 tons. + = Page 132 Building the Market Supply Curve

10. Merging Demand and Supply Price Quantity D S P E Q E Market clearing price

11. Merging Demand and Supply Price Quantity D S P E Q E Chapters 3-5

13. Merging Demand and Supply Price Quantity D S P E Q E Chapters 6-7

15. Concept of Producer Surplus Producer surplus is a fancy term economists use for profit . We measure producer surplus as the area above the supply curve and below the market equilibrium price. Page 133

16. Concept of Producer Surplus Producer surplus is a fancy term economists use for profit. We measure producer surplus as the area above the supply curve and below the market equilibrium price. Total economic surplus is therefore equal to consumer surplus discussed in Chapter 4 plus producer surplus. Page 133

17. Page 133 F G Product price Market Price of $4 A B Producer surplus at $4 is equal to area ABC

18. Page 133 F G Producer surplus at $6 is equal to area EDC Product price Suppose Price Increased to $6…

19. Page 133 The gain in producer surplus if the price increases from $4 is equal to area AEDB F G Producers are better off economically by responding to this price increase by producing output G C

20. Economic Welfare Concepts We can use the concepts of market demand and supply to assess the effects of events in the economy have upon the economic well being of consumers and products in a particular market during a specific period. We do this using the total economic surplus which is given by: Total economic Consumer Producer surplus surplus surplus = +

21. An Example of Economic Welfare Analysis Page 136-137 Assume a drought occurs that results in a decrease in supply from S to S*. Before this happened, consumer surplus was area 3+4+5 while producer surplus was equal to area 6+7. Total economic equals area 3+4+5+6+7

22. An Example of Economic Welfare Analysis After the decrease in supply, consumer surplus is just area 3. They lose area 4 and area 5. Producers gain area 4 but lose area 7. Page 136-137

23. An Example of Economic Welfare Analysis Consumers are therefore worse off because of the drought. Producers are also worse off if area 4 is less than area 7. Society loses area 5+7. Page 136-137

24. Measuring Surplus Levels Product price D S $4 10 $1 $7 Consumer surplus is equal to (10 x (7-4)) ÷2, or $15 Page 136-137

25. Measuring Surplus Levels Product price D S $4 10 $1 $7 Consumer surplus is equal to (10 x (7-4)) ÷2, or $15 Producer surplus is Equal to (10 x (4-1)) ÷2, or $15 Page 136-137

26. Measuring Surplus Levels Product price D S $4 10 $1 $7 Consumer surplus is equal to (10 x (7-4)) ÷2, or $15 Producer surplus is Equal to (10 x (4-1)) ÷2, or $15 Total economic surplus is therefore $30… Page 136-137

27. Modeling Commodity Prices

28. Forecasting Future Commodity Price Trends D S $4 10 $1 $7 D = a – bP + cYD + eX Own price Disposable income Other factors Page 136-137

29. D S $4 10 $1 $7 S = n + mP – rC + sZ Own price Input costs Forecasting Future Commodity Price Trends Other factors Page 136-137

30. Projecting Commodity Price Page 221 D = S D S $4 10 $1 $7 D = 10 – 6P + .3YD + 1.2X S = 2 + 4P – .2C + 1.02Z Substitute the demand and supply equations into the the equilibrium condition and solve for price

32. Market Disequilibrium

33. Market Surplus At the price is P S , producers would supply Q S . Page 138

34. Market Surplus At the price is P S , consumers would only want Q D . Page 138

35. Market Surplus At the price is P S , a market surplus equal Q S – Q D exists Page 138

36. Market Shortage At the price is P D , producers would only supply Q S . Page 138

37. Market Shortage C onsumers want Q D at this low price. Page 138

38. Market Shortage C onsumers want Q D at this low price. Page 138 At the price is P S , a market shortage equal Q D – Q S exists

39. Adjustments to Market Equilibrium Markets converge to equilibrium over time unless other events in the economy occur. One explanation for this adjustment which makes sense in agriculture is the Cobweb theory . This names stems from the spider like trail the adjustment process makes.

40. Year Two Reactions Producers use last year’s price as their expected price for year 2. Consumers on the other hand pay this year’s price determined by Q 2 . Page 140

41. Year Three Reactions P 2 P 3 Producers now decide to produce less at the lower expected price. This lower quantity pushes price up to P 3 in year 3. Page 140

42. Cobweb Pattern Over Time Market equilibrium The market converges to market equilibrium where demand intersects supply at price P E . In some markets, this adjustment period may only be months or even weeks rather than years assumed here. Page 140

43. Market-to-Firm Linkages

44. Some Important Jargon We need to distinguish between movement along a demand or supply curve, and shifts in the demand or supply curve.

45. Some Important Jargon We need to distinguish between movement along a demand or supply curve, and shifts in the demand or supply curve. Movement along a curve is referred to as a “ change in the quantity demanded or supplied”. A shift in a curve is referred to as a “change in demand or supply”.

46. Page 135 Increase in demand pulls up price from P e to P e * Decrease in demand pushes price down from P e to P e *

47. Page 135 Increase in supply pushed price down from P e to P e * Decrease in supply pulls up price from P e to P e *

48. Merging Demand and Supply Price Quantity D S P E Q E Chapters 6-7 Chapters 3-5

49. Firm is a “Price Taker” Under Perfect Competition Price Quantity D S P E Q E Price O MAX AVC MC The Market The Firm

50. If Demand Increases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 10 11 D 1

51. If Demand Decreases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 9 10 D 2

52. Firm is a “Price Taker” in the Input Market Price Quantity D S P E Q E Price L MAX MVP MIC Labor Market The Firm

53. Firm is a “Price Taker” in the Input Market Price Quantity D S P E Q E Price L MAX MVP MIC Labor Market The Firm

54. Effects of Increasing The Minimum Wage Price Quantity D S P MIN Q D Price L MAX MVP MIC Labor Market The Firm Q S

56. Chapter 9 focuses on market equilibrium and product prices under conditions of imperfect competition ….