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
- 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.
- 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.