Tuesday, July 16, 2013

Market Equilibrium

The operation of the market clearly depends on the interaction between suppliers and demanders.
At any moment, one of three conditions prevails in every market:

(1) The quantity demanded exceeds the quantity supplied at the current price, a situation called  
excess demand.
(2) the quantity supplied exceeds the quantity demanded at the current price, a situation called excess supply; 
(3) the quantity supplied equals the quantity demanded at the current price, a situation called equilibrium. At equilibrium, no tendency for price to change exists.


Excess demand

 Excess supply

Figure 3.10 illustrates another excess supply/surplus situation. At a price of $3 per bushel, suppose farmers are supplying soybeans at a rate of 40,000 bushels per year, but buyers are demanding only 20,000.With 20,000 (40,000 minus 20,000) bushels of soybeans going unsold, the market price falls. As price falls from $3.00 to $2.50, quantity supplied decreases from 40,000 bushels per year to 35,000. The lower price causes quantity demanded to rise from 20,000 to 35,000.At $2.50, quantity demanded and quantity supplied are equal. For the data shown here, $2.50 and 35,000 bushels are the equilibrium price and quantity, respectively.

Market equilibrium

In Figure 3.11, the new supply curve (the supply curve that shows the relationship between price and quantity supplied after the freeze of coffee) is labeled S1 at new equilibrium price 2.40$ .At the initial equilibrium price, $1.20, there is now a shortage of coffee . If the price were to remain at $1.20, quantity demanded would not change; it would remain at 13.2 billion pounds.
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