P. 1
lessons_for_the_young_economist_murphy

# lessons_for_the_young_economist_murphy

|Views: 41|Likes:

### Availability:

See more
See less

07/28/2015

pdf

text

original

156 | Lessons for the Young Economist

the availability of a certain resource—we methodically walk through the
impacts on supply and demand for a particular good or service, and then
we can gauge the ultimate impact on the market price But before we give
some examples (in the next section), you frst need to see the standard dem-
onstration of how stable supply and demand curves provide a target or an
anchor for the market price

Let’s fnish up with our gasoline market example from above In the
table below, we’ve combined the information from the demand and supply
schedules for the whole market, and we’ve also added two new calcula-
tions for each hypothetical price:

Market for Gasoline (Tuesday Afternoon)

Price

Supply

Demand

Surplus

Shortage

\$ 7 00

270 0

14 5

255 5

0 0

\$ 6 50

270 0

15 0

255 0

0 0

\$ 6 00

270 0

16 5

253 5

0 0

\$ 5 50

230 0

17 0

213 0

0 0

\$ 5 00

210 0

17 0

193 0

0 0

\$ 4 50

180 0

20 0

160 0

0 0

\$ 4 00

155 0

20 0

135 0

0 0

\$ 3 50

130 0

21 5

108 5

0 0

\$ 3 00

110 0

34 5

75 5

0 0

\$ 2 50

36 0

36 0

0 0

0 0

\$ 2 00

10 0

44 0

0 0

34 0

\$ 1 50

5 0

53 0

0 0

48 0

\$ 1 00

0 0

57 0

0 0

57 0

\$ 0 50

0 0

57 0

0 0

57 0

\$ -

0 0

57 0

0 0

57 0

A surplus (or a “glut”) occurs when producers are trying to sell more
units of a good or service than consumers want to purchase (at a particular
price) A shortage occurs when consumers want to buy more units than

Lesson 11: Supply and Demand | 157

producers want to sell (at a particular price) In this context, the equilibrium
price
(or the market-clearing price) is the one at which the amount supplied
exactly equals the amount demanded If the market is in equilibrium, there
is no surplus and no shortage

In our example, the equilibrium market price is \$2 50 per gallon of gas-
oline this price is in equilibrium because it balances the pressures of the
consumers and the producers (In physics, a ball at rest on a table is in equi-
librium because the downward force of gravity is exactly counterbalanced
by the upward force of the table pushing against the ball ) the idea is that if
the price for some reason happened to be more than \$2 50 per gallon, mar-
ket forces would push it down

For example, if producers thought the market price on this tuesday
afternoon would be \$3 50, they would plan on selling a total of 130 gallons
of gasoline But at this posted price, consumers would only start buying
at a pace to purchase a total of 21 5 gallons during the course of the day If
the owners of the Quik Mart and Fill ’er up stubbornly clung to the price
of \$3 50, they would end up with a surplus of 108 5 gallons that they had
planned on selling but couldn’t the defnition of supply (at various prices)
is how many units producers would sell if they actually received that hypo-
thetical price for every supplied unit Because the owners of our gas stations
would soon realize that they had misjudged the market—meaning that
they would not be able to sell a combined 130 gallons for \$3 50 each—they
would reduce the posted gasoline price and revise their ambitious sales
projections 2

On the other hand, if the market price should happen to be below \$2 50
on this tuesday afternoon, market forces would tend to push it up spe-
cifcally, the owners would realize that customers were buying gasoline in
larger quantities than the owners had planned on selling at the low price
Consequently the owners would raise the posted price, so that they could

2

Of course in the real world, different markets have different degrees of price
“stickiness ” A gasoline station can actually change prices very quickly, even from
minute to minute if need be Other markets, such as housing, usually see much
slower price changes the same principles apply, but to be realistic the story would
involve a home buyer lowering his or her asking price after (say) several months

158 | Lessons for the Young Economist

earn more profts and avoid the awkward situation of having to shut down
the store early and send customers away with no gas

Our intuitive arguments show that the only “stable” or equilibrium price
for gasoline is \$2 50 per gallon especially if we assume that the supply and
demand schedules remained fairly stable in our hypothetical community,
we would expect that in practice the actual market price would be \$2 50 (or
very close to it) At this price, producers want to sell exactly as many gal-
lons as consumers want to buy—36 gallons with our specifc numbers this
is the equilibrium quantity

In a generic supply and demand graph, the equilibrium price and quan-
tity line up with the intersection of the curves, as we show below In many
textbooks, these items are denoted P* and Q*

We can also use the generic graph to denote a surplus (from a price PH
that is too high) and a shortage (from a price PL

that is too low) the sizes of
the surplus and shortage are also indicated by the respective brackets

Q

P

D

s

P*

Q*

Lesson 11: Supply and Demand | 159

People who are untrained in economic thinking often tie themselves in
knots when they try to analyze some world event and its impact on prices
For example, if OPeC countries announce that they are reducing their out-
put of oil, many people—sometimes even newspaper reporters!—will say
nonsense like this:

“the OPeC announcement means a reduction in the sup-
ply of oil, which will raise prices However, at the higher
prices there will be less demand for oil, which will lower
prices ”

thus we apparently conclude that the OPeC announcement will both
raise and lower oil prices! now that you are armed with the tools of sup-
ply and demand analysis, you can avoid such silliness We’ll frst deal with
two examples of changes on the supply side, and then we’ll deal with two
examples of changes on the demand side Our ffth example will involve
simultaneous changes to supply and demand

Q

P

D

s

P*

Q*

PH

PL

suRPLus

sHORtAGe

scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->