If the price is $4.00 per pound, suppliers will offer eight million pounds of coffee per month but consumers will only wish to purchase four million pounds. At this price, there is an excess quantity supplied of four million pounds per month. Suppliers with unsold coffee will accept a lower price to get rid of it. As price falls, some suppliers reduce their output (a movement along the supply curve) and some consumers buy more (a move- ment along the demand curve) until the equilibrium price of $3.00 is reached. This $3.00 price again clears the market. Note that the equilibrium price and quantity do not simply represent the point where the amount sold equals the amount bought. Quantities bought and sold are always equal, even in disequilibrium. Four million pounds per month would be bought and sold at $2.00 and at $4.00. Equilibrium occurs at a price for which the quantity supplied and the quantity demanded are equal. Figure 3.7 shows market supply and market demand curves for coffee, based on the sup- ply and demand schedules in Table 3.3. The equilibrium price is $3.00, and six million pounds per month is sold at equilibrium. At $4.00, there is an excess quantity supplied and price will fall. This causes the quantity demanded to increase and the quantity sup- plied to decrease. The opposite happens at a price of $2.00 per pound.
Section 3.3 Market Equilibrium CHAPTER 3 Figure 3.7: Supply of and demand for coffee At equilibrium, the amount consumers wish to purchase is equal to the amount suppliers wish to sell. The price established at equilibrium is called the market-clearing price. At prices above the market- clearing price, quantity supplied exceeds quantity demanded. At prices below the market-clearing price, quantity demanded exceeds quantity supplied. Supply, Demand, and Economic Models As you learned in Chapter 1, the primary work of economists is to construct theories and models that explain and predict how the economy works and to use those theories and models to devise policies to make it work better. All theories and models share certain techniques and certain assumptions regarding how households and firms make decisions about using resources for production and consumption. The supply and demand model can be used to illustrate some of these techniques and assumptions. 0 2 4 5 1 3 1 2 3 4 6 5 7 8 10 9 Pounds/Month (Millions) D S 4 million excess quantity supplied 4 million excess quantity demanded Price/Pound (Dollars) Check Point: Markets in Equilibrium • We combine market supply and market demand to determine the market equilibrium. • Equilibrium occurs at a price where quantity supplied is equal to quantity demanded. • At the market-clearing price, there is no tendency for price or quantity to change.
Section 3.3 Market Equilibrium CHAPTER 3 Equilibrium In this model, equilibrium is found at that price for which the quantity demanded is equal to the quantity supplied. Equilibrium (and its counterpart, disequilibrium ) is a term that you will encounter often. This book will discuss equilibrium prices, equilibrium quantities,