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4: Market Equilibrium and Modeling

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    299273

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    Learning Objectives
    • Identify an equilibrium in a single market given a supply equation and a demand equation.
    • Distinguish between exogenous and endogenous variables.
    • Predict the impact of a change in an exogenous variable on the equilibrium price and quantity in a single market.
    • Use elasticities to model the impact of an exogenous shock on a market equilibrium.
    • Calculate exogenous demand and supply shocks using elasticities. Use these shocks to model changes to an equilibrium.
    • Distinguish between partial equilibrium models and general equilibrium models.
    • Explain feedback from one market to another within a general equilibrium model.

    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:

    • 4.1: Market Equilibrium
      This page covers market equilibrium, where demand meets supply, and introduces a mathematical model to determine the equilibrium price and quantity. It highlights how shocks can disrupt this equilibrium, necessitating price adjustments. The difference between endogenous (model-determined) and exogenous (external) variables is noted.
    • 4.2: Using Elasticities to Model an Equilibrium
      This page explains how to model market equilibria through elasticities and percentage changes in demand and supply. It introduces key formulas for calculating equilibrium price and quantity changes based on exogenous shocks. Real-world examples, like the effects of Hoof and Mouth Disease on livestock and consumer value changes for chicken, are provided to illustrate these concepts. Specifically, a 3% price reduction for chicken leads to a 3.3% demand shock and subsequently results in a 1.
    • 4.3: Markets - Supply and Demand
      The market mechanism is a useful and powerful analytical tool. The market model can be used to explain and forecast movements in prices and quantities of goods and services. The market impacts of current events, government programs and policies, and technological changes can all be evaluated and understood using supply and demand analysis. Markets are the foundation of all economics!
    • 4.4: Partial vs. General Equilibrium Models
      This page explains the impact of exogenous shocks on interconnected markets, criticizing partial equilibrium models for isolating markets and ignoring interdependent feedback. It contrasts these with general equilibrium models, which capture these interactions and demonstrate how supply changes can lead to amplified price effects through related goods.
    • 4.5: Finding Solutions in Equilibrium Models with Multiple Markets
      This page covers modeling supply and demand across markets using matrix algebra, starting with a single market model and progressing to a two-market system. It explains organizing equations into matrix form, defining relevant variables, and the equation \( \bf{Ax = b} \) for market analysis. Additionally, it explores solving linear systems with software for market equilibrium, addressing elasticity estimates through a case study on berry markets.
    • 4.6: Concluding Comments
      This page emphasizes the application of demand and supply elasticities to model market responses to external shocks, guiding students in predicting changes in market price and quantity. It includes Problem Sets 1 and 2 to reinforce these key concepts in a specific market context.
    • 4.7: References
      This page offers a compilation of references regarding Foot-and-Mouth Disease (FMD), emphasizing its economic ramifications, particularly from UK outbreaks and prospective effects in the US. It includes key articles on the cessation of UK activities due to FMD, economic analyses of outbreak impacts, and USDA publications on preventive strategies. The summaries provide valuable insights into the implications of FMD in agriculture and public health.
    • 4.8: Problem Sets
      This page discusses exercises on estimating shocks and changes in market equilibrium using supply and demand elasticities. It covers various scenarios involving external factors affecting production and willingness to pay, requiring calculations of supply and demand shocks, as well as changes in equilibrium price and quantity.

    This page titled 4: Market Equilibrium and Modeling is shared under a CC BY-SA 4.0 license and was authored, remixed, and/or curated by Michael R. Thomsen via source content that was edited to the style and standards of the LibreTexts platform.