Equilibrium Prices:
So far we have not introduced prices, or markets. If there are only two persons involved they will meet and presumably start a process of haggling about the terms of exchange of the two goods. The outcome of this process cannot be predicted, only that the outcome will likely occur inside the cross-hatched areas, which will define an exchange rate implicitly. However, let us assume that there are a lot of consumers of two types, one group of consumers with the same preferences as consumer 1, and another group with the same preferences as consumer 2. This makes it more likely that there will be one exchange rate between the two goods, which applies to all consumers, i.e., a market price ratio, p1/p2. In this case we write the budget constraints for the two consumers as, Now, the question is how the prices are established? First we should note that we must choose one good to express the terms of exchange in. Let us choose good 2 and thus set p2=1 (this means that one unit of good 2 cost one unit of good 2, not surprisingly). We can now look at how much of the goods that the two consumers want to sell or buy of the two goods as we vary the price of good 1.
In figure above I’ve drawn three price lines going through the endowment point. Let us start with the high price of good, p11; in this case consumer1, who is a net seller of good 1, naturally wants to sell a lot of good 1in exchange for good 2, his best point is at C1; consumer 2, who is a net demander of good 1, doesn’t want to buy very much, her best point is C2. Since, consumer 1 wants to sell more than consumer 2 wants to buy at this price, we have an excess supply, and the price, p11, is too high to be an equilibrium price. Turning now to the low price, p21, consumer 1 doesn’t want to sell very much (B1), while consumer 2 wants to buy a great amount (B2) of good 1; here the price is too low and there is an excess demand. The intermediate price, p∗1, is an equilibrium price, since at point A, the quantity that consumer 1 wants to sell is equal to the quantity that consumer 2 wants to buy of good 1. Note also that the equilibrium can be determined as the intersection of the two offer curves (OC1 and OC2) of the two consumers. We now proceed by defining a so called aggregate excess demand function for good 1 :
z1(p1) = (x11 − ω11) + (x21 − ω21).
At a general equilibrium the aggregate excess demand functions should be equal to zero (or non-positive) for all goods (zi(p1) = 0, i = 1, 2.). Using the prices in figure above, we have that,
z1(p11) < 0,z2(p11) > 0,
and
z1(p21) > 0,z2(p21) < 0,
while,
z1(p∗1) = 0,z2(p∗1) = 0.
Here we also included the aggregate excess demand function for good 2, which we did not discuss before; however, in this two good case, it will always have the reverse sign compared to that for good 1 (unless we have an equilibrium).
Latest technology based Economics Online Tutoring Assistance
Tutors, at the www.tutorsglobe.com, take pledge to provide full satisfaction and assurance in Intermediate Microeconomics homework help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Intermediate Microeconomics, project ideas and tutorials. We provide email based Intermediate Microeconomics homework help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Intermediate Microeconomics. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Economics homework help and assignment help services. They use their experience, as they have solved thousands of the Computer assignments, which may help you to solve your complex issues of Intermediate Microeconomics. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.
Arthropods tutorial all along with the key concepts of Features of Arthropoda, Categorization of Arthropods, Insecta, Habitat and Habit of Cockroach, characteristics of Arachnid-Spider, Adaptive characteristics of Arthropods
Explore the brilliance of best International Economics Assignment Help instantly to secure top grades at budget-friendly prices.
tutorsglobe.com significance of viruses assignment help-homework help by online viruses tutors
Classification of Terpenes tutorial all along with the key concepts of Monoterpenes, Acyclic Monoterpenes, Monocyclic Monoterpenes, Bicyclic Monoterpenes, Sesquiterpenes, Diterpenes, Sesterpenes and Triterpenoids
Nervous coordination in animals tutorial all along with the key concepts of Divisions of Nervous System, Brain, Spinal cord, Functions of spinal cord, Peripheral Nervous System, Structure of Neuron, Reflex Action and Sensory Receptors
poor contrast or dim picture; but there is sufficient brightness, dim picture; insufficient brightness, out of focus or defocus, arcing in picture tube, , silvery picture
www.tutorsglobe.com offers software development process models homework help, assignment help, case study, writing homework help, online tutoring assistance by computer science tutors.
www.tutorsglobe.com offers statement of financial position homework help-assignment help by online accounting tutors.
Labour cost audit program - Proper use of labour and increase in productivity are at present receiving greater attention. Various Productivity Teams have emphasised great significance on higher productivity.
Theory and lecture notes of Queues and Data communication all along with the key concepts of Queues and Data communication. Tutorsglobe offers homework help, assignment help and tutor’s assistance on Queues and Data communication.
the returning stream of electrons reaches the gun close to the aperture by which electron beam come out. the aperture is an element of a metal disc that covering the gun electrode.
www.tutorsglobe.com offers Depreciation of Plant and Machinery homework help, assignment help, case study, writing homework help, online tutoring assistance by accounting tutors.
tutorsglobe.com dual property of an electron assignment help-homework help by online atomic structure tutors
low insulation is approximately always the result of absorption of moisture through the insulated windings, because most of the insulating materials used are hygroscopic (moisture absorbent).
tutorsglobe.com isometric and aerobic exercises assignment help-homework help by online muscles tutors
1949663
Questions Asked
3689
Tutors
1472101
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!