Economics · Ch 13 — Market Equilibrium
Summary
Summary
- Market equilibrium in a perfectly competitive market occurs at the price where market demand equals market supply, so that the plans of all buyers and sellers match and the market clears.
- With a fixed number of firms, the equilibrium price and equilibrium quantity are determined at the point where the market demand and market supply curves intersect.
- In the labour market, each firm employs labour up to the point where the marginal revenue product of labour equals the wage rate (); under perfect competition this equals the value of the marginal product of labour.
- With the supply curve unchanged, a rightward (leftward) shift of the demand curve raises (lowers) both the equilibrium quantity and the equilibrium price, when the number of firms is fixed.
- With the demand curve unchanged, a rightward (leftward) shift of the supply curve raises (lowers) the equilibrium quantity but lowers (raises) the equilibrium price, when the number of firms is fixed.
- When the demand and supply curves shift in the same direction, the effect on equilibrium quantity is unambiguous, while the effect on equilibrium price depends on the relative magnitudes of the shifts.
- When the demand and supply curves shift in opposite directions, the effect on equilibrium price is unambiguous, while the effect on equilibrium quantity depends on the relative magnitudes of the shifts.
- In a perfectly competitive market with identical firms and free entry and exit, the equilibrium price is always equal to the minimum average cost of the firms.
- With free entry and exit, a shift in demand has no impact on the equilibrium price but changes the equilibrium quantity and the number of firms in the same direction as the change in demand. …