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4: Market Equilibrium and Equilibrium Modeling
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Learning Objectives
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In this chapter you will use material learned earlier in the course to be better understand price determination and the behavior of markets. The chapter starts with a general overview of an equilibrium for a single market and then moves on to a basic framework for predicting the effect of a shock to either the demand or supply side of the market on the equilibrium price and quantity. In most real-world modeling exercises, elasticities are used to characterize an equilibrium in percentage change form. These models are often called “equilibrium displacement models” and are the topic of the second section of the chapter. Again, the emphasis will first be on a single market to keep things simple. The third and fourth sections of the chapter extend the framework to examine the effects of a shock on multiple markets simultaneously. This provides a more realistic treatment of actual markets because a shock to one market will generally reverberate through other related markets. Feedback from these related markets will amplify or diminish the effect in the market experiencing the initial shock. The specific learning objectives for this chapter are as follows:
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Identify an equilibrium in a single market given a supply equation and a demand equation.
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Distinguish between exogenous and endogenous variables.
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Predict the impact of a change in an exogenous variable on the equilibrium price and quantity in a single market.
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Use elasticities to model the impact of an exogenous shock on a market equilibrium.
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Calculate exogenous demand and supply shocks using elasticities. Use these shocks to model changes to an equilibrium.
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Distinguish between partial equilibrium models and general equilibrium models.
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Explain feedback from one market to another within a general equilibrium model.