Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 5

Draw simple supply and demand curve models for determining the prices of X and Y in Figure Show the "disequilibrium" points X-| and X\ on yourdiagram for good X and points Y1 and Yj on your diagram for good Y. Describe how both of these markets reach equilibrium simultaneously.
With an arbitrary initial price ratio, firms will produce X1, Y1; the economy's budget constraint will be given by line CC. With this budget constraint, individuals demand X01 , Y1, that is, there is an excess demand for good X (X01_ X1) and an excess supply of good Y (Y1 _ Y01 ). The workings of the market will move these prices toward their equilibrium levels P_X ,P_Y. At those prices, society's budget constraint will be given by the line C*C*, and supply and demand will be in equilibrium. The combination X*, Y* of goods will be chosen, and this allocation is efficient.