Market equilibrium represents a state where the forces of supply and demand are balanced. It is the point where the supply and demand curves intersect, establishing the equilibrium price (P*) and quantity (Q*). In this state, the actions of buyers and sellers create no tendency for the price or the quantities traded to change. At the equilibrium price, the amount of a good consumers wish to purchase is exactly equal to the amount producers wish to sell, a condition also known as market clearing. This equilibrium state is also considered a Nash equilibrium because no single participant can gain by unilaterally changing their price offer, assuming all others maintain their prices.

Market Equilibrium

The theoretical conditions required for a competitive equilibrium serve a dual purpose. They not only help determine if the competitive market model is suitable for analyzing a specific market but also highlight the characteristics that promote competition and lead to beneficial societal outcomes.

Using Competitive Equilibrium Conditions to Foster Favorable Market Outcomes

To algebraically determine the competitive equilibrium price (P*) and quantity (Q*) in a market, the direct demand function, $Q = D(P)$, and the direct supply function, $Q = S(P)$, must be solved simultaneously. The equilibrium price is found by equating the two functions, as it is the price at which quantity demanded equals quantity supplied. Once the equilibrium price (P*) is calculated, the corresponding equilibrium quantity (Q*) can be found by substituting P* back into either the demand or the supply function.

Mathematical Determination of Equilibrium Price and Quantity Using Direct Functions

An alternative method for finding market equilibrium involves using the inverse supply and demand functions. This process begins by equating the inverse supply function ($P = C'(Q)$), which represents price as a function of marginal cost, with the inverse demand function ($P = f(Q)$). Solving this equation yields the equilibrium quantity ($Q^*$). Subsequently, the equilibrium price ($P^*$) is determined by substituting the equilibrium quantity back into either the inverse supply or inverse demand equation.

Mathematical Determination of Equilibrium Quantity and Price Using Inverse Functions

A widely used economic process for modeling markets with numerous buyers and sellers involves the use of supply and demand curves. These curves illustrate the quantity of a good that sellers will provide and buyers will desire at any given price. By identifying the intersection of these curves, the market-clearing price is determined, which is the point where the quantity supplied equals the quantity demanded.

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Developed by Alfred Marshall, this model explains how prices are determined in markets with numerous buyers and sellers of identical goods. It proposes that a supply curve is shaped by the prices sellers are willing to accept, while a demand curve is determined by the willingness to pay of buyers. A key assumption of this model is that all goods being traded are homogeneous. Marshall contended that through the process of 'higgling and bargaining' in such a market, the price would consistently move towards an equilibrium level where the quantity that buyers demand equals the quantity that sellers supply.

Marshall's Model of Supply and Demand

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

During the late nineteenth century, a common feature in most English towns was a corn exchange. This was a dedicated building that served as a marketplace for farmers to meet with merchants and sell their grain. Economist Alfred Marshall prominently used this real-world market as an illustrative example for his model of supply and demand.

The English Corn Exchange

The market for used university textbooks exemplifies how market principles operate, from traditional, decentralized interactions to modern online platforms. In past scenarios, transactions relied on direct negotiation between buyers and sellers to determine a price based on individual willingness to pay (WTP) and willingness to accept (WTA), a dynamic similar to the historical grain markets that economist Alfred Marshall studied to create his supply and demand model. Contemporary versions of this market have shifted to online platforms, streamlining the process of connecting student buyers and sellers.

Market for Second-Hand University Textbooks

A fundamental premise of Alfred Marshall's supply and demand model is that the goods being sold are homogeneous, meaning they are all identical in type and quality. This was the case in his example of the corn exchange, where all grain was considered the same. When applying this model to other markets, like second-hand textbooks, the same simplifying assumption is made, treating all books as identical despite potential variations in their actual condition.

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