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Therefore, at the start of the day,
he decides to market his apples at
$1.20. If his sales are going well, he
may feel he can make more money
and raise his price to $1.25. This
may cause a slowdown in sales,
but if he manages to sell his entire
stock, he will be happy. However, if
the end of the day is nearing and
he finds that he still has quite a few
apples left, he might decide to drop
his price to $1.15 to avoid being left
with an excess of apples that are
likely to rot before his next chance
to sell them.
In this example the costs of
production are fixed, and the
urgency of selling the crop is the
pressing factor. This is useful in
illustrating the differences between
short- and long-term markets. The
farmer will decide how many
apples to plant for his next harvest,
based on his sales this time, and
in this way the market should
eventually arrive at equilibrium.
The farmer’s market is also
limited by distance. There is only
a certain radius within which it
makes economic sense to sell his
products. For instance the cost
involved in shipping his apples
overseas would make his prices
uncompetitive with domestic
producers. This means that,
to some extent, the farmer is
at liberty to set his prices slightly
higher because his customers
cannot travel to seek alternatives.
The opposite scenario to the
fruit farmer is the market for a
global commodity such as gold. In
this long-term market the holderof the gold is under no time
pressure to sell. He can be confident
that it will maintain its value. The
larger the market and the more
widespread the knowledge of the
market, the more likely it is that
the commodity has found its
equilibrium price. This makes
any small change in market price
significant, and any change will
spark a flurry of buying and selling.
Although these examples
introduce further complexity into
the market, they hold true to the
basic rule that suppliers will only
sell at a price they find acceptable,
while buyers will only buy at a price
they find reasonable.
The examples all relate to a
market in which physical goods are
traded, but supply and demand is
relevant throughout economic
reasoning. The model is applicable
to the labor market, for instance.
Here the individual is the supplier,
selling his or her labor, and
employers are the consumers,
looking to buy labor as cheaply
as possible. Money markets are also
analyzed as a supply and demand
system, with the interest rate
acting as the price.
Economists call Marshall’s
work “partial equilibrium” analysis
because it shows how a single
market reaches equilibrium or
balance through the forces of
supply and demand. However,
an economy is made up of many
different interacting markets. The
question of how all these can come
together in a state of “general
equilibrium” is a complex problem
that was analyzed by Léon Walras
(p.120) in the 19th century. ■Producers of goods such as Coca-
Cola may influence demand through
advertising that promotes the product
and the brand. As demand rises, the
price of the product may also rise.INDUSTRIAL AND ECONOMIC REVOLUTIONS
The price of any
commodity rises or falls
by the proportion of
the number of buyers and
sellers... [this rule] holds
universally in all things that
are to be bought and sold.
John Locke