Figure E8.4 is a diagram that illustrates the gains from trade that are generated at the point of equilibrium in the bread market.

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The competitive equilibrium price and quantity in a market can be determined graphically by identifying the point where the supply and demand curves intersect. Figure 8.11 provides an example of this principle in the bread market. The diagram shows that the market demand and supply curves cross at a point corresponding to a market-clearing price of €2.00 and a quantity of 5,000 loaves. This intersection signifies the competitive equilibrium.

Graphical Determination of Competitive Equilibrium (Figure 8.11)

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

A key characteristic of a competitive equilibrium is that it occurs where the demand curve intersects the market marginal cost curve. At this point, the market price is equal to both the marginal cost of producing the last unit and the willingness to pay of the marginal consumer who purchases that unit.

Equality of Price, Marginal Cost, and Willingness to Pay at Competitive Equilibrium

In the competitive equilibrium of the bread market, occurring at point A where 5,000 loaves are sold for €2 each, both consumers and producers realize a surplus on every transaction up to this quantity. For each of the 5,000 loaves, the consumer's surplus is the difference between their willingness to pay (WTP) and the €2 price. Simultaneously, the bakeries' surplus for each loaf is the difference between the €2 price and their marginal production cost.

Surplus Distribution in the Bread Market's Competitive Equilibrium

Figure E8.4: Equilibrium and Gains from Trade in the Bread Market

This figure illustrates a short-run competitive equilibrium in a market composed of 20 cake producers.

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