Chapter

Theories of Market Equilibrium

GREGORY C. CHOW

in Dynamic Economics

Published in print April 1997 | ISBN: 9780195101928
Published online October 2011 | e-ISBN: 9780199855032 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195101928.003.0004
Theories of Market Equilibrium

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The most basic model of equilibrium involves how the intersections between the demand function and the supply function illustrate the price and amount of output of a certain commodity. In exchange economy situations wherein the quantity of supply is fixed, the price of the good is determined through the demand function. This chapter illustrates a situation in this exchange economy which involves how a certain good is produced by a certain number of firms owned by consumers that utilize one type of capital good. In such situations, the problem is to determine the price functions which denote the dividends of all the firms involved. This chapter explains how to identify the utility function faced by consumers that is subject to a certain budget constraint through setting up the consumer’s dynamic optimization program. This chapter includes discussions about various theories of market equilibrium.

Keywords: equilibrium; demand function; supply function; price function; dynamic optimization

Chapter.  10990 words. 

Subjects: Financial Markets

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