AP_Krugman_Textbook

68 section 2 Supply and Demand

figure 6.7

Price Above Its Equilibrium

Level Creates a Surplus

The market price of $1.50 is above the equi-

librium price of $1. This creates a surplus: at a

price of $1.50, producers would like to sell

11.2 billion pounds but consumers want to

buy only 8.1 billion pounds, so there is a sur-

plus of 3.1 billion pounds. This surplus will

push the price down until it reaches the equi-

librium 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

8.1 11.2

E

Surplus

Quantity

supplied

Quantity

demanded

As the figure shows, at a price of $1.50 there would be more coffee beans available

than consumers wanted to buy: 11.2 billion pounds, versus 8.1 billion pounds. The dif-

ference of 3.1 billion pounds is the surplus—also known as the excess supply—of coffee

beans at $1.50.

This surplus means that some coffee producers are frustrated: at the current price,

they cannot find consumers who want to buy their coffee beans. The surplus offers an

incentive for those frustrated would-be sellers to offer a lower price in order to poach

business from other producers and entice more consumers to buy. The result of this

price cutting will be to push the prevailing price down until it reaches the equilibrium

price. So the price of a good will fall whenever there is a surplus—that is, whenever the

market price is above its equilibrium level.

Why Does the Market Price Rise If It Is Below the

Equilibrium Price?

Now suppose the price is below its equilibrium level—say, at $0.75 per pound, as shown

in Figure 6.8. In this case, the quantity demanded, 11.5 billion pounds, exceeds the

quantity supplied, 9.1 billion pounds, implying that there are would-be buyers who

cannot find coffee beans: there is a shortage—also known as an excess demand—of

2.4 billion pounds.

When there is a shortage, there are frustrated would-be buyers—people who want to

purchase coffee beans but cannot find willing sellers at the current price. In this situa-

tion, either buyers will offer more than the prevailing price or sellers will realize that

they can charge higher prices. Either way, the result is to drive up the prevailing price.

This bidding up of prices happens whenever there are shortages—and there will be

shortages whenever the price is below its equilibrium level. So the market price will al-

ways rise if it is below the equilibrium level.

There is a surplusof a good when the
quantity supplied exceeds the quantity
demanded. Surpluses occur when the price is
above its equilibrium level.

There is a shortageof a good when the
quantity demanded exceeds the quantity
supplied. Shortages occur when the price is
below its equilibrium level.