This preview shows page 1. Sign up to view the full content.
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
at an Auction
Price 06 (128-153) EMC Chap 06 $4
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...
View Full Document
This document was uploaded on 01/16/2014.
- Winter '14