Unit 8 discusses markets with many buyers and sellers and introduces the model of supply and demand. It includes an explanation of the intuition behind each curve, shifts in the curves, short-and long-run equilibria, and a discussion of competitive equilibria.
This unit’s main model is the supply and demand model. It also includes a model of how a firm operating in a perfectly competitive market determines its profit-maximizing quantity. The unit also includes a game-theory model which demonstrates how increasing the degree of competition can break a cartel by turning it into a Prisoner’s Dilemma.
The firm operating in a perfectly competitive market is assumed to have a horizontal marginal cost curve with a step function, in contrast to The Economy 1.0 where the firm had an upward sloping marginal cost curve. The market supply curve is derived from these individual supply curves, assuming heterogeneity between firms.
The existing material has been streamlined and the unit now includes some topics which were previously in Unit 11, including the role of prices as conveyors of information, short- and long-run equilibrium with entry of new firms, price controls, and a case study on oil prices.
This is the header we’ve chosen for Unit 8.