AP_Krugman_Textbook

Using Equilibrium to Describe Markets

We have now seen that a market tends to have a single price, the equilibrium price. If
the market price is above the equilibrium level, the ensuing surplus leads buyers and
sellers to take actions that lower the price. And if the market price is below the equilib-
rium level, the ensuing shortage leads buyers and sellers to take actions that raise the
price. So the market price always moves towardthe equilibrium price, the price at which
there is neither surplus nor shortage.

module 6 Supply and Demand: Supply and Equilibrium 69

Section 2 Supply and Demand

figure 6.8

Price Below Its Equilibrium

Level Creates a Shortage

The market price of $0.75 is below the equi-

librium price of $1. This creates a shortage:

consumers want to buy 11.5 billion pounds,

but only 9.1 billion pounds are for sale, so

there is a shortage of 2.4 billion pounds. This

shortage will push the price up until it reaches

the equilibrium price of $1.

010157 13 17

Quantity of coffee beans

(billions of pounds)

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Price of

coffee beans

(per pound)

Supply

Demand

9.1 11.5

E

Shortage

Quantity

supplied

Quantity

demanded

Module 6 AP Review

Check Your Understanding

1. Explain whether each of the following events represents (i) a
   change insupply or (ii) a movement alongthe supply curve.
   a. During a real estate boom that causes house prices to rise,
   more homeowners put their houses up for sale.
   b. Many strawberry farmers open temporary roadside stands
   during harvest season, even though prices are usually low at
   that time.
   c. Immediately after the school year begins, fewer young people
   are available to work. Fast-food chains must raise wages,
   which represent the price of labor, to attract workers.
   d. Many construction workers temporarily move to areas that
   have suffered hurricane damage, lured by higher wages.
   e. Since new technologies have made it possible to build larger
   cruise ships (which are cheaper to run per passenger),

Caribbean cruise lines have offered more cabins, at lower

prices, than before.

2. In the following three situations, the market is initially in
   equilibrium. After each event described below, does a surplus or
   shortage exist at the original equilibrium price? What will
   happen to the equilibrium price as a result?
   a. In 2010 there was a bumper crop of wine grapes.
   b. After a hurricane, Florida hoteliers often find that many
   people cancel their upcoming vacations, leaving them with
   empty hotel rooms.
   c. After a heavy snowfall, many people want to buy
   second-hand snowblowers at the local tool shop.

Solutions appear at the back of the book.