Sunday, August 28, 2011

Two special cases of market equilibrium



There are two special cases of market equilibrium that are worth mentioning since they come up fairly often. The first is the case of fixed supply. Here the amount supplied is some given number and is independent of price; that is, the supply curve is vertical. In this case the equilibrium quantity is determined entirely by the supply conditions and the equilibrium price is determined entirely by demand conditions.

The opposite case is the case where the supply curve is completely horizontal. If an industry has a perfectly horizontal supply curve, it means that the industry will supply any amount of a good at a constant price. In this situation the equilibrium price is determined by the supply conditions, while the equilibrium quantity is determined by the demand curve.

The two cases are depicted below. In these two special cases the determination of price and quantity can be separated; but in the general case the equilibrium quantity are jointly determined by the demand and supply curves.

Two special cases of equilibrium

Special cases of equilibrium. Case A shows a vertical supply curve where the equilibrium price is determined solely by the demand curve. Case B depicts a horizontal supply curve where the equilibrium price is determined solely by the supply curve.
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