48 PA R T I INTRODUCTION AND BACKGROUND
marginal costs rise, the firm will require higher and higher prices to justify
market The arena in which
demanders and suppliers
interact.
market equilibrium The com-
bination of price and quantity
that satisfies both demand and
supply, determined by the inter-
action of the supply and
demand curves.
FIGURE 2-13
Price, P
PE
producing additional units.
Equilibrium
We have discussed the source of individual demand curves (utility maximiza-
tion) and firm supply curves (profit maximization). To undertake welfare
analysis we need to translate these concepts to their counterparts at the level
of the market, the arena in which demanders and suppliers actually interact
(such as the supermarket or a Web site). To do so, we add up the demands of
each individual who is demanding goods in this market, and the supplies of
each firm that is supplying goods in this market. We horizontally sum these
curves. That is, at each price, we add up all the quantities available to be pur-
chased at that price by demanders to obtain market-level demand, and all the
quantities available to be supplied at that price by suppliers to obtain market-
level supply.The result is the market-level supply and demand curves shown in
Figure 2-13.
The market-level supply and demand curves interact to determine the
market equilibrium, the price and quantity pair that will satisfy both
demand and supply. This point occurs at the intersection of the supply and
demand curves, such as point E in Figure 2-13. Given the equilibrium price
PE, demanders will demand the equilibrium quantity, QE, and suppliers will
be willing to supply that equilibrium quantity. The competitive market equi-
librium represents the unique point at which both consumers and suppliers
are satisfied with price and quantity.
Market Outcome The supply and
demand curves for movies intersect at
Supply the equilibrium point E, where both
consumers and suppliers are satisfied
with price and quantity.
E
Demand
QE Quantity, Q