1. Market Equilibrium and Market Demand: Perfect Competition
Chapter 8

2. Discussion Topics Derivation of market supply curve
Elasticity of supply and producer surplus
Market equilibrium under perfect competition
Total economic surplus
Adjustments to market equilibrium

3. Remember the firm’s supply curve?
P=MR=AR
Page 123

4. Page 162 Firm’s supply curve starts at shut down level of output
P=MR=AR
Firm’s supply curve
starts at shut down
level of output
Page 162

5. Page 162 Profit maximizing firm will desire to produce where MC=MR
P=MR=AR
Page 162

6. Page 162 Economic losses will occur beyond output OMAX, where
MC > MR
P=MR=AR
Page 162

7. Building the Market Supply Curve
Market supply curve can be thought of as the horizontal summation
of the supply decisions of all firms in the market. Here, at a price
of $1.50, Gary would supply 2 tons of broccoli and Ima would
supply 1 ton, giving a market supply of 3 tons.
Page 163

8. Building the Market Supply Curve+
Market supply curve can be thought of as the horizontal summation
of the supply decisions of all firms in the market. Here, at a price
of $1.50, Gary would supply 2 tons of broccoli and Ima would
supply 1 ton, giving a market supply of 3 tons.
Page 163

9. Building the Market Supply Curve+ =
Market supply curve can be thought of as the horizontal summation
of the supply decisions of all firms in the market. Here, at a price
of $1.50, Gary would supply 2 tons of broccoli and Ima would
supply 1 ton, giving a market supply of 3 tons.
Page 163

10. Merging Demand and Supply
Price D S PE
Market clearing price QE
Quantity

11. Merging Demand and Supply
Price D S PE
Chapters 3-5 QE
Quantity

12. Merging Demand and Supply
Factors that change
demand:
Other prices
Consumer income
Tastes and preferences
Real wealth effect
Global events
Price D* D S
PE* PE QE
QE*
Quantity

13. Merging Demand and Supply
Price D S
Chapters 6-7 PE QE
Quantity

14. Merging Demand and Supply
Factors that change
supply:
Input costs
Government policy
Price expectations
Weather & disease
Global events
Price D S
PE* PE
QE* QE
Quantity

15. Concept of Producer Surplus
Producer surplus is a fancy term economists
use for profit. We measure producer surplus
as the area above the supply curve and
below the market equilibrium price.
Page 165

16. Concept of Producer Surplus
Producer surplus is a fancy term economists
use for profit. We measure producer surplus
as the area above the supply curve and
below the market equilibrium price.
Total economic surplus is therefore equal to
consumer surplus discussed in Chapter 4
plus producer surplus.
Page 165

17. Market Price of $4 Page 165 Producer surplus at $4B
Product price
Producer surplus at $4
is equal to area ABC F G
Page 165

18. Suppose Price Increased to $6…
Product price
Producer surplus at $6
is equal to area EDC F G
Page 165

19. The gain in producer surplus if the price increases from $4
is equal to area AEDB
Producers are better
off economically by
responding to this
price increase by
producing output G C F G
Page 165

20. Economic Welfare Concepts
We can use the concepts of market demand
and supply to assess the effects of events
in the economy have upon the economic
well being of consumers and products in
a particular market during a specific period.
We do this using the total economic surplus
which is given by:
Total economic Consumer Producer
surplus surplus surplus = +

21. An Example of Economic Welfare Analysis
Assume a drought occurs
that results in a decrease
in supply from S to S*.
Before this happened,
consumer surplus was
area while producer
surplus was equal to
area Total economic
equals area
Page 169

22. An Example of Economic Welfare Analysis
After the decrease in
supply, consumer surplus
is just area 3. They lose
area 4 and area 5.
Producers gain area 4 but
lose area 7.
Page 169

23. An Example of Economic Welfare Analysis
Consumers are therefore
worse off because of the
drought.
Producers are also worse
off if area 4 is less than
area 7.
Society loses area 5+7.
Page 169

24. Measuring Surplus Levels$7 D
Consumer surplus is
equal to (10 x (7-4))÷2,
or $15 S $4
Product price $1 10
Page 168

25. Measuring Surplus Levels$7 D
Consumer surplus is
equal to (10 x (7-4))÷2,
or $15 S $4
Product price
Producer surplus is
Equal to (10 x (4-1))÷2,
or $15 $1 10
Page 168

26. Measuring Surplus Levels$7 D
Consumer surplus is
equal to (10 x (7-4))÷2,
or $15 S $4
Product price
Producer surplus is
Equal to (10 x (4-1))÷2,
or $15 $1 10
Total economic surplus
is therefore $30…
Page 168

27. Modeling Commodity Prices

28. Forecasting Future Commodity Price Trends$7 D S
D = a – bP + cYD + eX $4
Own
price
Disposable
income
Other
factors $1 10
Page 168

29. Forecasting Future Commodity Price Trends$7 D S
Own
price
Input
costs
Other
factors $4
S = n + mP – rC + sZ $1 10
Page 168

30. Projecting Commodity Price$7 D S
D = 10 – 6P + .3YD + 1.2X $4
D = S
S = 2 + 4P – .2C Z $1 10
Substitute the demand and supply
equations into the the equilibrium
condition and solve for price
Page 221

31. Many Applications Policy decisions by Congress and the president
Commodity modeling by brokers and traders
Credit repayment capacity analysis by lenders
Outlook presentations by extension economists
Planting decisions by farmers
Herd size and feedlot placement decisions by livestock producers
Strategic planning for processors

32. Market Disequilibrium

33. Market Surplus
At the price is PS,
producers would
supply QS.
Page 170

34. At the price is PS, consumers would only want QD. Market Surplus
Page 170

35. At the price is PS, a market surplus equal QS – QD exists
Page 170

36. At the price is PD, producers would only supply QS. Market Shortage
Page 170

37. Market Shortage
Consumers
want QD at this
low price.
Page 170

38. At the price is PS, a market shortage equal QD – QS exists Consumers
want QD at this
low price.
Page 170

39. Adjustments to Market Equilibrium
Markets converge to equilibrium over time
unless other events in the economy occur.
One explanation for this adjustment which
makes sense in agriculture is the Cobweb
theory. This names stems from the spider
like trail the adjustment process makes.

40. Year 2 Reactions Page 172 Producers use last year’s
price as their expected
price for year 2.
Consumers on the other
hand pay this year’s
price determined by Q2.
Page 172

41. Year 3 Reactions Page 172 Producers now decide to
produce less at the lower
expected price. This
lower quantity pushes
price up to P3 in year 3.
Page 172

42. Cobweb Pattern Over Time
Market
equilibrium
The market converges to
market equilibrium where
demand intersects supply
at price PE. In some
markets, this adjustment
period may only be months
or even weeks rather than
years assumed here.
Page 172

43. Market-to-Firm Linkages

44. Some Important Jargon We need to distinguish between movement
along a demand or supply curve, and shifts
in the demand or supply curve.

45. Some Important Jargon We need to distinguish between movement
along a demand or supply curve, and shifts
in the demand or supply curve.
Movement along a curve is referred to as a
“change in the quantity demanded or supplied”.
A shift in a curve is referred to as a “change
in demand or supply”.

46. Increase in demand
pulls up price from
Pe to Pe*
Decrease in demand
pushes price down
from Pe to Pe*
Page 167

47. Increase in supply
pushed price down
from Pe to Pe*
Decrease in supply
pulls up price from
Pe to Pe*
Page 167

48. Merging Demand and Supply
Price D S
Chapters 6-7 PE
Chapters 3-5 QE
Quantity

49. Firm is a “Price Taker” Under Perfect Competition
The Market
The Firm
Price
Price D S
AVC MC PE QE
OMAX
Quantity

50. If Demand Increases…… The Market The Firm Price Price S AVC MC PE QE
10 11
Quantity

51. If Demand Decreases…… The Market The Firm Price Price D S D2 AVC MC PEQE
9 10
Quantity

52. Firm is a “Price Taker” in the Input Market
Labor Market
The Firm
Price
Price D S
MVP
MIC PE QE
LMAX
Quantity

53. Firm is a “Price Taker” in the Input Market
Labor Market
The Firm
Price
Price D S
MVP PE
MIC QE
LMAX
Quantity

54. Effects of Increasing The Minimum Wage
Labor Market
The Firm
Price
Price D S
MVP
PMIN
MIC QD QS
LMAX
Quantity

55. Summary
Market equilibrium price and quantity are given by the intersection of demand and supply
Producer surplus captures the profit earned in the market by producers
Total economic surplus is equal to producer surplus plus consumer surplus
A market surplus exists when the quantity supplied exceeds the quantity demanded.
A market shortage exists when the quantity demanded exceeds the quantity supplied.

56. Chapter 9 focuses on market equilibrium and product prices under conditions of imperfect competition….