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C. Equilibrium Of Supply And Demand

Up to this point we have been considering demand and supply in isolation. We know the amounts that are willingly bought and sold at each price. We have seen that consumers demand different amounts of cornflakes, cars, and computers as a function of these goods’ prices. Similarly, producers willingly supply different amounts of these and other goods depending on their prices. But how can we put both ‘des of the market together?

The answer is that supply and demand interact to produce an equilibrium price and quantity, or a market equilibrium. The market equilibrium comes at that price and quantity where the forces of supply and demand are in balance. At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell. The reason we call this an equilibrium is that, when the forces of supply and demand are in balance, there is no reason for price to rise or fall, as long as other things remain unchanged.

Let us work through the cornflakes example in able 3-5 to see how supply and demand determine market equilibrium; the numbers in this table come m Tables 3-1 and 3-3. To find the market priced quantity, we find a price at which the amounts ride to be bought and sold just match. If we try a price of \$5 per box, will it prevail for long? Clearly not. As row A in Table 3-5 shows, at \$5 producers would like to sell 18 million boxes per year while demands want to buy only 9. The amount supplied at \$5 exceeds the amount demanded, and stocks of cornflakes pile up in supermarkets. Because too few consumers are chasing too many cornflakes, the price of cornflakes will tend to fall, as shown in column (5) of Table 3-5.

Say we try \$2. Does that price clear the market? A quick look at row D shows that at \$2 consumption exceeds production. Com-flakes begin to disappear from the stores at that price. As people scramble around to find their desired cornflakes, they will tend to bid up the price of cornflakes, as shown in column (5) of Table 3-5.

We could try other prices, but we can easily see that the equilibrium ‘price is \$3, or row C in Table 3- 5. At \$3, consumers’ desired demand exactly equals producers’ desired production, each “Of which is 12 units: Only at \$3 will consumers and suppliers both be making consistent decisions. ‘

A market equilibrium comes at the price at which quantity demanded equals quantity sup- plied. At that equilibrium, there is no tendency for the price to rise or fall. The equilibrium price is also called the telemarketing price. This denotes
that all supply and demand orders are filled, the books are “cleared” of orders, and demands and suppliers are satisfied.

The table shows the quantities supplied and demanded at different prices. Only at the equilibrium price of \$3 per box does amount supplied equal amount demanded. At too Iowa price there is a shortage and price tends to rise. Too high a price produces a surplus, which Will depress the price.

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