Equilibrium

Supply and demand schedules show how many items buyers would purchase and how many items sellers would offer at different prices. But by them­selves, they do not show at what price goods or ser­vices would actually change hands. When the two forces are brought together, however, something quite significant takes place. The interaction of sup­ply and demand will result in an equilibrium or market price. The market price, where supply equals demand, is the one at which goods or services will actually be exchanged.

To illustrate, the following chart combines the demand and supply schedules for T-shirts.

Table 3-7 and Figure 3-8 show that the market price would be $10.00 because at that price the quantity of T-shirts demanded and the quantity supplied are exactly equal. Once an equilibrium price is estab­lished, prices will go up and down some, but they seldom stray far from equilibrium. Why do prices become stable at the equilibrium price?

Excess Quantity Demanded. Suppose T-shirts sold for $7.50 on October 1. According to the Demand and Supply Schedule (Table 3-7), at that price consumers would be willing and able to buy 175 shirts. But Lauren and Ralph would not be will­ing to spend their time printing T-shirts to sell at such a low price. They would supply only 80 shirts at that price. They would realize, however, that they could ask more for their shirts when student demand for shirts is greater than their supply.

They would offer their T-shirts at higher and higher prices until the quantity they were willing to supply equaled the quantity consumers were willing and able to purchase. An excess quantity demanded will lead to price increases, which will continue until demand and supply are equal.

Excess Quantity Supplied. By contrast, suppose that Lauren and Ralph and others began selling T-shirts at $17.50 each. At that price (see Table 3-7) only 50 customers would be interested in a shirt. Lauren and Ralph, however, would hope to sell 185. There would be an excess quantity supplied—135 shirts.

With all those shirts, Lauren and Ralph would need to have a sale. As they lowered prices, they would sell more and more shirts. Here, again, the process would continue until the quantity supplied exactly equaled the quantity demanded.

One may conclude that an excess quantity supplied will result in price decreases until a new equilibrium is reached.

Equilibrium Price and Quantity. In both instances, prices increased or decreased as long as it took buyers and sellers to "clear the market"—to arrive at a price where the supply and the demand for T-shirts were exactly equal.

If, however, T-shirt sales had begun at $10.00, prices would not have changed at all. This is because $10.00 was the equilibrium price where the quantity demanded exactly equaled the quantity supplied. Figure 3-9 summarizes these points graphically.

As long as supply and demand remain unchanged, the equilibrium or market price will remain stable.

Date: 2015-02-16; view: 924