Equilibrium
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Equilibrium
- Only one price and quantity are compatible with the
existing intentions of both the buyers and the sellers.
- Equilibrium Price – The price at which the quantity
of a good demanded in a given time period equals the quantity supplied.
- Market Clearing
- An equilibrium doesn't imply that everyone is happy with
the prevailing price or quantity.
- The equilibrium price is not determined by any single
individual.
Rather it is determined by the collective behavior of many buyers and
sellers,
each acting out his or her own demand or supply schedule.
- Although not everyone gets full satisfaction from the
market equilibrium, that unique outcome is efficient.
- The Invisible Hand
- The equilibrium price and quantity reflect a compromise
between
buyers and sellers. No other compromise yields a quantity
demanded
that's exactly equal to the quantity supplied.
- Adam Smith characterized this market mechanism as “the
invisible hand”.
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Surplus and Shortage
- When seller's asking prices are too high, a market surplus
is created.
- Market Surplus – The amount by which the quantity
supplied exceeds the quantity demanded at a given price; excess supply.
- An Initial Shortage - When seller's asking prices
are too low, a market shortage is created.
- Market Shortage - The amount by which the
quantity demanded exceeds the quantity supplied at a given price;
excess demand.
- Self-Adjusting Prices
- Whenever the market price is set above or below the
equilibrium price, either a market surplus or a market shortage will
emerge.
- To overcome a surplus or shortage, buyers and sellers
will change their behavior.
- Only at the equilibrium price will no further adjustments
be required.
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Changes in Equilibrium
- No equilibrium price is permanent.
- The equilibrium price will change whenever the supply or
demand curve shifts.
- A Demand Shift – Should the demand curve shift, the
result will be a change in equilibrium price and quantity.
- A Supply Shift – Should the supply curve shift, the
result will be a change in equilibrium price and quantity.
- Changes in supply and demand occur when the determinants of
supply and demand change.
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Market Outcomes
- Optimal, Not Perfect
- Not everyone is happy with market outcomes, but we are
given the opportunity to maximize our own satisfaction.
- Although the outcomes of the marketplace are not perfect,
they
are often optimal, i.e., the best possible given our incomes and scarce
resources.
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Changing Yearly
Data to Base Year Data:
- decide on a base year (in our example
below we use 1990 as the base year)
- convert each year's numbers by using the following
formula
year to convert
----------------- x 100 = base year value for the new year
base year
- the new values reflects a relative (i.e., percentage)
change from the base year
Year
|
US Exports
in billions
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US Imports
in billions
|
US Exports
1990 base year
|
US Imports
1990 base year
|
1990
|
389
|
498
|
100
|
100
|
1991
|
417
|
491
|
107
|
99
|
1992
|
440
|
536
|
113
|
108
|
1993
|
457
|
589
|
117
|
118
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1994
|
502
|
669
|
129
|
134
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1995
|
576
|
749
|
148
|
150
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1996
|
612
|
803
|
157
|
161
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1997
|
680
|
876
|
175
|
176
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1998
|
670
|
917
|
172
|
184
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1999
|
684
|
1030
|
176
|
207
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2000
|
773
|
1223
|
199
|
246
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