Supply And Demand - Chapter 3 Page 24
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37Chapter 3: Supply and Demand
75
F I G U R E
9
1. At a price of $5.00 per
bottle an excess supply of
Excess Supply Causes
30,000 bottles …
Price to Fall
Price
Excess Supply
per
S
at $5.00
Bottle
$5.00
L
K
2. causes the price
to drop …
E
3. shrinking the excess
3.00
supply until price reaches
its equilibrium value
of $3.00
D
Number
35,000
50,000
65,000
of Bottles
per Month
same quantity that households would want to buy. So, when price comes to rest at
$3.00, quantity comes to rest at 50,000 per month—the equilibrium quantity.
No doubt, you have noticed that $3.00 happens to be the price at which the
supply and demand curves cross. This leads us to an easy, graphical technique for
locating our equilibrium:
To find the equilibrium price and quantity in a competitive market, draw the
supply and demand curves. The equilibrium price and equilibrium quantity
can then be found on the vertical and horizontal axes, respectively, where the
two curves cross.
Notice that in equilibrium, the market is operating on both the supply curve and
the demand curve so that—at a price of $3.00—quantity demanded and quantity
supplied are equal. There are no dissatisfied buyers unable to find goods they want
to purchase, nor are there any frustrated sellers unable to sell goods they want to
sell. Indeed, this is why $3.00 is the equilibrium price. It’s the only price that creates
consistency between what buyers choose to buy and sellers choose to sell.
But we don’t expect a market to stay at any particular equilibrium forever, as
you’re about to see.
WHAT HAPPENS WHEN THINGS CHANGE?
Remember that in order to draw the supply and demand curves in the first place,
we had to assume particular values for all the other variables—besides price—that
affect demand and supply. If one of these variables changes, then either the supply
curve or the demand curve will shift, and our equilibrium will change as well. Let’s
look at some examples.
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