Market pricing by supply and demand
(This appendix is adapted from Worthington and Britton (2000). Pricing will be analysed further in Chapter 9.)
Introduction
In every market there will be a buyer and a seller who must be brought together so that a sale can take place. In a market economy this takes place through the market mechanism. In the product market the buyer is the household and the seller is the firm. Households demand the good or service that is supplied by a firm or firms.
The market is the place where buyers and sellers meet and demand and supply are brought together. Table 5.7 contains information on the level of supply and demand of a specific good. This information is presented graphically in Fig 5.22.
The equilibrium price
At a price of £ 1.20, the quantity demanded is the same as the quantity supplied at 48,000 pints per week. At this price the amount that consumers wish to buy is the same as the amount that producers wish to sell. This price is called the equilibrium price and the quantity being bought and sold is called the equilibrium quantity. The point of equilibrium can be seen on Figure 5.22 at the point where the demand and supply curves cross.
At price level above £1.20 the quantity that producers wish to supply is greater than quantity consumers wish to buy. There is excess supply and the market is a buyer’s market. At prices less than £1.20 consumers wish to buy more than producers wish to supply. There is excess demand and the market is a seller’s market.
In competitive markets, situations of excess demand or supply should not exist for long as forces are put into motion to move the market toward equilibrium. For example, if the price level is £1.30 per pint, there is excess supply and producers will be forced to reduce the price in order to sell their beer. Consumers may be aware that they are in a buyer’s market and offer lower prices, which firms might accept. For one or these reasons, there will be a tendency for prices to be pushed to be pushed back towards the equilibrium price. The opposite occurs at prices below equilibrium and price is pushed upwards towards equilibrium.