blanchard_ch03

If the price is 150 a bar 10 million bars a week are

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Unformatted text preview: shortage nor a surplus. Neither buyers nor sellers have an incentive to change the price. The price at which the quantity demanded equals the quantity supplied is the equilibrium price. And 10 million bars a week is the equilibrium quantity. animation 9160335_CH03_p053-080.qxd 6/22/09 8:56 AM Page 65 Market Equilibrium million bars a week, as shown by the blue arrow. At each price below $1.50 a bar, there is a shortage of bars. For example, at $1.00 a bar, the shortage is 9 million bars a week, as shown by the red arrow. Price Adjustments You’ve seen that if the price is below equilibrium, there is a shortage and that if the price is above equilibrium, there is a surplus. But can we count on the price to change and eliminate a shortage or a surplus? We can, because such price changes are beneficial to both buyers and sellers. Let’s see why the price changes when there is a shortage or a surplus. A Shortage Forces the Price Up Suppose the price of an energy bar is $1. Consumers plan to buy 15 million bars a week, and producers plan to sell 6 million bars a week. Consumers can’t force producers to sell more than they plan, so the quantity that is actually offered for sale is 6 million bars a week. In this situation, powerful forces operate to increase the price and move it toward the equilibrium price. Some producers, noticing lines of unsatisfied consumers, raise the price. Some producers increase their output. As producers push the price up, the price rises toward its equilibrium. The rising price reduces the shortage because it decreases the quantity demanded and increases the quantity supplied. When the price has increased to the point at which there is no longer a shortage, the forces moving the price stop operating and the price comes to rest at its equilibrium. A Surplus Forces the Price Down Suppose the price of a bar is $2. Producers plan to sell 13 million bars a week, and consumers plan to buy 7 million bars a week. Producers cannot force consumers to buy more than they plan, so the quantity that is actually bought is 7 million ba...
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This note was uploaded on 04/04/2012 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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