Microeconomic Market Equilibrium

Perfect Competition §

Conditions:

1. Zero profit condition: $\pi =px-c(x)=0$

2. Pricing at marginal cost:

   1. ! only when $MC$ is constant…
   2. $p=MC$

3. Theory of the Firm but with…

   • Fixed costs, i.e. $\pi =px-wl-rk-FC$
   • Firms will enter and exit
     • ⇒ supply price and quantity is at $\pi =0$
   • → market price and individual firm’s quantity supplied are determined by this formula.
   • This is equivalent to the minimum average cost condition $mi{n}_{x}AC(x)$.

4. Utility Maximization but…

   • Consider only one good, $x_1$
   • There are more than one consumers. $x_1^{\text{market demand}}=x_1\times \text{\# of consumers}$

5. Market equilibrium:

   • Price is set at $p^{\ast }$ because it is fully determined by the firm.
     • The quantity supplied changes by firms entering and exiting (not by individual firms ramping up or cutting down on production!)
   • Quantity demanded (=aggregate quantity supplied) of $x^{\ast }$ is fully determined by the consumer.

Short Run §