Consumer's Equilibrium and Demand Cardinal Equilibrium: A consumer's equilibrium price and quantity are determined by the market forces of supply and de...
Consumer's Equilibrium and Demand
Cardinal Equilibrium:
A consumer's equilibrium price and quantity are determined by the market forces of supply and demand, assuming that both perfectly compete.
Ordinal Equilibrium:
A consumer's equilibrium price and quantity are determined by their own preferences, budget constraints, and the prices of related goods.
Formal Definitions:
Equilibrium price: The price at which the quantity of a good or service that a consumer is willing to buy is equal to the quantity that they are willing to sell at that price.
Equilibrium quantity: The quantity at which a consumer is willing to buy a good or service at the equilibrium price.
Example:
A perfectly competitive market has an equilibrium price of $10 and a quantity of 100 units sold at that price.
The equilibrium price for a different market with the same quantity of 100 units sold at that price would be $15.
A consumer with a utility function that is increasing in absolute value will have an equilibrium price and quantity that are higher than those of a consumer with a utility function that is decreasing in absolute value.
A consumer with a higher income will be willing to pay more for a good or service, resulting in an equilibrium price and quantity that is higher than that of a consumer with a lower income.
Implications of Equilibrium:
Equilibrium price and quantity minimize the total cost for consumers.
A balanced supply and demand creates a stable market environment.
Equilibrium prices are not affected by changes in consumer preferences or market conditions