Partial Equilibrium and Market Dynamics
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Questions and Answers

What is the expression for the marginal cost obtained from the cost function?

  • $ rac{Q}{K}$
  • $wK$
  • $ rac{2Q}{K}$
  • $2w$ (correct)

How is the supply curve for good x derived in this context?

  • By setting P equal to MC (correct)
  • By setting P equal to AVC
  • By differentiating the cost function
  • By equating demand to supply

What is the equilibrium price for good x in the short run?

  • $20$
  • $5$
  • $15$
  • $10$ (correct)

What does the expression $X^D = X_S$ indicate in the context of the market?

<p>Market equilibrium condition (C)</p> Signup and view all the answers

What is the correct individual consumer demand function for good x?

<p>$ rac{I}{2p_x}$ (A)</p> Signup and view all the answers

What factor has no influence on market demand when applying Cobb-Douglas preferences?

<p>The distribution of income among consumers (D)</p> Signup and view all the answers

What does the Marshallian demand function for a good x represent?

<p>The quantity purchased by a consumer to maximize utility based on prices and income. (D)</p> Signup and view all the answers

In perfect competition, how do firms determine their supply of good x?

<p>By analyzing both marginal costs and average variable costs (C)</p> Signup and view all the answers

What is the role of the capital fixed in the short run for a firm's production function?

<p>It limits the output based on the available labor (B)</p> Signup and view all the answers

In the context of the market demand curve, which of the following is true?

<p>Total market demand is the sum of individual demands from all consumers. (D)</p> Signup and view all the answers

What equation best represents market supply based on individual firms?

<p>XS = Σ Qix(px, w, v) for all firms (B)</p> Signup and view all the answers

What does partial equilibrium analysis focus on?

<p>An individual market in isolation, holding all other markets fixed. (C)</p> Signup and view all the answers

If Firm 1 has a capital of K1 = 40 and Firm 2 has K2 = 20, what would you expect about their production capabilities in the short run?

<p>Firm 1 will produce more than Firm 2, given the capital differences. (D)</p> Signup and view all the answers

Assuming three consumers have different incomes but face the same prices, how would their individual demands influence the market demand curve?

<p>It would aggregate their demands to determine the total quantity demanded at each price point. (C)</p> Signup and view all the answers

Which utility function was used as an example to explain market demand in the content?

<p>U(x, y) = x^1/2 y^1/2 (C)</p> Signup and view all the answers

What ensures that firms will continue operating in the market in the long run?

<p>P = MC = AC (A), P &gt; AC (D)</p> Signup and view all the answers

What happens to the market supply curve when firms exit the market?

<p>It shifts to the left, raising the price. (D)</p> Signup and view all the answers

In long run equilibrium, what is the relationship between price, marginal cost, and average cost?

<p>P = MC = AC (A)</p> Signup and view all the answers

If each firm in the market is producing according to the cost function C(Qx) = Q2x + 25, what is the form of the firm's marginal cost (MC)?

<p>MC = 2Qx (D)</p> Signup and view all the answers

What happens to profits when new firms enter the market due to positive profits in the short run?

<p>Overall profits decrease as prices drop. (B)</p> Signup and view all the answers

Flashcards

Marshallian Demand

The demand for a good by a consumer, represented by the quantity they are willing to purchase at a given price.

Market Demand

The total demand for a good in a market, calculated by summing the individual demands of all consumers.

Homothetic Preferences

Preferences that are characterized by indifference curves that are equally spaced along any given ray from the origin.

Short Run Market Supply Curve

The portion of the marginal cost curve that lies above the average variable cost curve, representing the quantity firms are willing to supply at various prices.

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Production Function

A mathematical relationship that describes the maximum output that can be produced with a given set of inputs.

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Market Demand Curve

The total demand for a good in the entire market, calculated by summing up the individual demand curves of all consumers. This curve shows the relationship between the price of a good and the total quantity demanded by all consumers.

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Partial Equilibrium

This economic model analyzes a single market in isolation, assuming that all other markets remain unchanged. It focuses on the interplay of supply and demand within that specific market.

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Short Run Equilibrium

The point where the market demand curve intersects the short-run market supply curve. At this point, the quantity demanded equals the quantity supplied for the given time period.

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Long Run Equilibrium

The point where the market demand curve intersects the long-run market supply curve. This represents a stable situation where firms can adjust their production capacity to maximize profits, and there is no incentive for firms to enter or exit the market.

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Contingent Demand for Labor

The amount of labor a firm needs to produce a specific quantity of output, given a fixed amount of capital.

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Market Supply Curve

A curve that shows the total quantity of goods that all firms in a market are willing to supply at different prices.

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Individual Demand Curve

A curve that shows the quantity of a good that a single consumer is willing to buy at different prices.

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Short Run Equilibrium Price

The price at which the quantity supplied and the quantity demanded are equal in the short run.

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Firm's Entry & Exit Decision

A firm decides to stay in the market if it makes positive profit (P > MC > AC). It exits if it makes negative profit.

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Market Supply Curve Shift

When firms enter the market, the supply curve shifts right, pushing down the price. When firms exit, the supply curve shifts left, raising the price.

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Cost Curve

A function that shows the total cost of production for a given quantity of goods. Example: C(Qx) = Q2x + 25.

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How to Calculate Equilibrium Price

Set the market demand and supply curves equal to each other, then solve for the price (px).

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Study Notes

Partial Equilibrium

  • This concept isolates one market, while holding other markets constant
  • It examines the interaction between consumers and firms in a given market
  • Future study will cover general equilibrium, which considers interconnected markets

Market Demand Curve

  • Definition: A consumer's Marshallian demand function shows the quantity of a good demanded at different prices and incomes to maximize utility
  • Formula: Xm = x(Px, Py, I)
  • Market Demand: The total demand for a good, calculated by summing the individual demands of all consumers in the market
  • Formula: XD = Σ Xi(Px, Py, Ii) where n is the number of consumers.
  • All consumers in the economy face the same prices

Short-Run Market Supply Curve

  • The portion of the marginal cost curve above average variable cost
  • Firms' individual supply depends on good X's price and input prices (e.g., labor and capital)
  • Market Supply: The sum of all individual firms' supplies.
  • Formula: Xs = Σ Q (Px, ω, Ï…), where n is the number of firms.
  • Firms take prices as fixed in perfect competition

Short-Run Equilibrium

  • Occurs when market supply equals market demand
  • Formula: XD = XS
  • Example: In one example, price = 10, quantity = 15

Long-Run Equilibrium

  • Firms enter or exit the market until profits are zero
  • Equilibrium price will change due to this entrance or exit
  • Equilibrium will occur at P = MC = AC

Long-Run Supply Curve

  • Its shape depends on how firm entry affects industry average costs
  • Constant Cost: Average cost doesn't change with firm entry. Long-run supply is horizontal
  • Increasing Cost: Average cost increases with firm entry. Long-run supply is upward sloping
  • Decreasing Cost: Average cost decreases with firm entry. Long-run supply is downward sloping

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Related Documents

Partial Equilibrium (Economics) PDF

Description

This quiz covers critical economic concepts such as partial equilibrium, market demand, and supply curves. It explores how consumers and firms interact in a single market while holding other markets constant, alongside detailed examination of demand and supply functions. Prepare to test your understanding of these fundamental theories in economics.

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