Page 109 - Krugmans Economics for AP Text Book_Neat

figure 6.6

Market Equilibrium
Price of
Market equilibrium occurs at point E, coffee beans
where the supply curve and the de- (per pound) Section 2 Supply and Demand
mand curve intersect. In equilibrium, Supply
the quantity demanded is equal to the $2.00
quantity supplied. In this market, the
equilibrium price is $1 per pound and 1.75
the equilibrium quantity is 10 billion 1.50
pounds per year.
1.25
Equilibrium 1.00 E Equilibrium
price
0.75

0.50 Demand

0 7 10 13 15 17
Quantity of coffee beans
Equilibrium (billions of pounds)
quantity

1. Why do all sales and purchases in a market take place at the same price?
2. Why does the market price fall if it is above the equilibrium price?
3. Why does the market price rise if it is below the equilibrium price?

Why Do All Sales and Purchases in a Market Take
Place at the Same Price?

There are some markets in which the same good can sell for many different prices, de-
pending on who is selling or who is buying. For example, have you ever bought a sou-
venir in a “tourist trap” and then seen the same item on sale somewhere else (perhaps
even in the shop next door) for a lower price? Because tourists don’t know which shops
offer the best deals and don’t have time for comparison shopping, sellers in tourist
areas can charge different prices for the same good.
But in any market where the buyers and sellers have both been around for some time,
sales and purchases tend to converge at a generally uniform price, so that we can safely
talk about the market price. It’s easy to see why. Suppose a seller offered a potential buyer
a price noticeably above what the buyer knew other people to be paying. The buyer
would clearly be better off shopping elsewhere—unless the seller was prepared to offer a
better deal. Conversely, a seller would not be willing to sell for significantly less than the
amount he knew most buyers were paying; he would be better off waiting to get a more
reasonable customer. So in any well-established, ongoing market, all sellers receive and
all buyers pay approximately the same price. This is what we call the market price.

Why Does the Market Price Fall If It Is Above the
Equilibrium Price?
Suppose the supply and demand curves are as shown in Figure 6.6 but the market price
is above the equilibrium level of $1—say, $1.50. This situation is illustrated in Figure
6.7 on the next page. Why can’t the price stay there?

module 6 Supply and Demand: Supply and Equilibrium 67