The price of 4 is referred to as the equilibrium

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Unformatted text preview: n a market that is in equilibrium). The price of $4 is referred to as the equilibrium price (the price at which a good is bought and sold in a market that is in equilibrium). Relationship of quantity supplied (Qs) to quantity demanded (Qd) Market condition Qs > Q d Surplus Q d > Qs Shortage Qd = Q s Equilibrium When the price was $6 a bushel and there was a surplus of corn, the auctioneer lowered the price. When the price was $2, resulting in a shortage, he raised the price. The behavior of the auctioneer can be summarized this way: If a surplus exists, lower the price; if a shortage exists, raise the price. In this way, the auctioneer moved the corn market into equilibrium. Not all markets have auctioneers. (When was the last time you saw an auctioneer in the grocery store?) Still, many markets act as if an auctioneer is calling out higher and lower prices until equilibrium price is EXHIBIT 6 -1 Supply Supply and Demand at Work Work at at an Auction Auction S $6 Equilibrium u $5 Price 06 (128-153) EMC Chap 06 $4 $3 $2 $1 0 D 10 20 30 40 50 60 Quantity (thousands of bushels of corn) Only at a price of $4 is the quantity demanded equal to the quantity supplied, with neither a surplus nor a shortage. reached. In many real-world markets, prices fall when a surplus occurs and rise when a shortage happens. Why Does Price Fall When a Surplus Occurs? With a surplus, suppliers will not be able to sell all they had hoped to sell, so their inventories (stock of goods on hand) grow beyond the normal level. Storing extra goods can be costly and inefficient; thus sellers want to reduce their inventories. Some will lower prices to do so; some will cut back on producing output; others will do a little of both. As shown in Exhibit 6-2, price and output tend to fall until equilibrium is achieved. Why Does Price Rise When There Is a Shortage? With a shortage, buyers will not be able to buy all they had hoped to buy. Some buyers will offer to pay a higher price to get sellers to sell to them rather tha...
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This document was uploaded on 01/16/2014.

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