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34 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS

S
Excess supply
when price
Price (dollars per bushel) $5 E
is $5

$4

Excess
FIGURE 2.5 Excess Demand and Excess $3 demand
Supply in Market for Corn when price is $3
If the price of corn were $3, per bushel, excess
demand would result because 14 billion bushels
would be demanded, but only 9 billion bushels D
would be supplied. If the price of corn were $5
per bushel, excess supply would result because 89 11 13 14
13 billion bushels would be supplied but only 8 Quantity (billions of bushels per year)
billion bushels would be demanded.

tendency for the market price to change as long as exogenous variables (e.g., rainfall,
national income) remain unchanged. At any price other than the equilibrium price,
pressures exist for the price to change. For example, as Figure 2.5 shows, if the price
excess supply A situa- of corn is $5 per bushel, there is excess supply—the quantity supplied at that price
tion in which the quantity (13 billion bushels) exceeds the quantity demanded (8 billion bushels). The fact that
supplied at a given price suppliers of corn cannot sell as much as they would like creates pressure for the price
exceeds the quantity to go down. As the price falls, the quantity demanded goes up, the quantity supplied
demanded.
goes down, and the market moves toward the equilibrium price of $4 per bushel. If
excess demand A situ- the price of corn is $3 per bushel, there is excess demand—the quantity demanded
ation in which the quantity at that price (14 billion bushels) exceeds the quantity supplied (9 billion bushels). Buyers
demanded at a given price of corn cannot procure as much corn as they would like, and so there is pressure for the
exceeds the quantity price to rise. As the price rises, the quantity supplied also rises, the quantity demanded
supplied.
falls, and the market moves toward the equilibrium price of $4 per bushel.

LEARNING-BY-DOING EXERCISE 2.3
S
D
E
Calculating Equilibrium Price and Quantity
Suppose the market demand curve for cran- Problem At what price and quantity is the market
d
berries is given by the equation Q 500 4P, while the for cranberries in equilibrium? Show this equilibrium
market supply curve for cranberries (when graphically.
s
P 50) is described by the equation Q 100 2P,
where P is the price of cranberries expressed in dollars per Solution At equilibrium, the quantity supplied equals
d
s
barrel, and quantity (Q or Q ) is in thousands of barrels the quantity demanded, and we can use this relationship
s
d
per year. to solve for P: Q Q , or 500 4P 100 2P,