ECON1001 · Introductory Microeconomics
Supply, Market Equilibrium & Welfare
Weeks 4-5 close the market loop and measure who wins. A competitive firm is a price taker with MR = P and sells until P = MC, so the firm's supply curve is its marginal cost curve; summing firm supplies horizontally gives market supply. Equilibrium is where Qd = Qs at the market-clearing price P*, and comparative statics predicts how P* and Q* move when a curve shifts. Welfare is measured with consumer surplus, producer surplus and total surplus, and the competitive equilibrium is Pareto efficient — it maximises total surplus.
What this chapter covers
- 01Firm as price taker; MR = P; sell until P = MC
- 02Firm supply curve = marginal cost curve; willingness to receive
- 03Law of supply and supply shifters (input costs, technology, expectations)
- 04Market supply by horizontal summation
- 05Equilibrium: Qd = Qs at P*; excess demand and excess supply
- 06Comparative statics in three steps
- 07Consumer surplus, producer surplus, total surplus as areas
- 08Pareto efficiency: competitive equilibrium maximises total surplus
Equilibrium, surplus and efficiency
- 3 marks · P* and Q*Set demand equal to supply: 90 − Q = 10 + Q → 80 = 2Q → Q* = 40, and P* = 10 + 40 = 50.
- 2 marks · CSConsumer surplus is the triangle between demand and price: choke price 90, so CS = ½ × (90 − 50) × 40 = ½ × 40 × 40 = 800.
- 2 marks · PSProducer surplus is the triangle between price and supply: supply intercept 10, so PS = ½ × (50 − 10) × 40 = ½ × 40 × 40 = 800.
- 2 marks · TS and efficiency reasoningTotal surplus = CS + PS = 1600. The outcome is efficient because every unit with marginal benefit at least marginal cost is traded and none beyond it, leaving no unrealised gains.
Key terms
- Price taker
- A firm so small relative to the market that it cannot influence price; it faces a horizontal demand at the market price, so its marginal revenue equals price.
- Willingness to receive
- The minimum price a firm will accept for a unit, equal to the marginal cost of that unit; tracing it out gives the supply curve.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied; above it there is excess supply, below it excess demand, both of which push price back toward P*.
- Comparative statics
- The method of predicting new equilibrium price and quantity by identifying which curve shifts and in which direction, then comparing before and after.
- Producer surplus (PS)
- The difference between the price received and marginal cost, summed across units — the area between the price line and the supply curve.
- Total surplus
- Consumer surplus plus producer surplus; it is maximised at the competitive equilibrium, which is therefore Pareto efficient.
Supply, Market Equilibrium & Welfare FAQ
Why is a firm's supply curve the same as its marginal cost curve?
A price-taking firm produces each unit while the price covers its marginal cost and stops where P = MC. The price it needs for each quantity is therefore exactly its marginal cost, so the (upward-sloping, above-shutdown) MC curve is the supply curve.
How do I do a comparative-statics question without messing up?
Use three steps: start at the original equilibrium, decide which single curve shifts and in which direction, then read off the new price and quantity. Resist shifting both curves unless the question genuinely changes two things.
Does Pareto efficiency mean the outcome is fair?
No. Efficiency only means no one can be made better off without harming someone else, which is equivalent to maximising total surplus. It says nothing about how that surplus is distributed, so an efficient outcome can still be highly unequal.
Exam move
Treat supply as the mirror image of demand: it is the MC curve, summed horizontally, with surplus measured as the area above it. Drill the equilibrium-then-surplus pipeline on linear examples until the triangle areas are instant, and always label the two intercepts before computing. For welfare-change questions, compute total surplus before and after the shift and attribute the difference to consumers, producers and any deadweight loss — this exact structure reappears in the tax, monopoly and trade chapters.
