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Dynamic EconomicsOptimization by the Lagrange Method$
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Gregory C. Chow

Print publication date: 1997

Print ISBN-13: 9780195101928

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780195101928.001.0001

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Theories of Market Equilibrium

Theories of Market Equilibrium

(p.51) Chapter Four Theories of Market Equilibrium
Dynamic Economics


Oxford University Press

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

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