Civil Engineering Reference
In-Depth Information
THE PRICE IS RIGHT
Look again at
Figure 3.3
: inevitably there is a point at which the two curves must
cross. This point represents the market price. The market price in
Figure 3.3
is P and
this reflects the point where the quantity supplied and demanded is equal, namely
point Q.
At price P the market clears. There is no excess supply; there is no excess
demand. Consumers and producers are both happy. Price P is called the
equilibrium
price
: the price at which the quantity demanded and the quantity supplied are equal.
Most markets tend towards an equilibrium price, including the labour market,
housing market, foreign exchange market, drainpipe market, or whatever. All
markets have an inherent balancing mechanism. When there is excess demand, price
rises; and when there is excess supply, prices fall. Eventually a price is found at
which there is no tendency for change. Consumers are able to get all they want at
that price, and suppliers are able to sell the amount that they want at that price. This
special market concept is illustrated in
Figure 3.4.
Figure 3.4
The determination of equilibrium price
In this example, the equilibrium price for each new flat is £100,000 and the equilibrium
quantity is 2,000 units. At higher prices there would be a surplus: flats would be in
excess supply and they will remain empty. For example at £150,000 the market would
not clear; there needs to be a movement along the demand curve from H to E and a
movement along the supply curve from h to E. These movements necessitate the price
to fall. At prices below the equilibrium, there would be a shortage: flats would be in
excess demand and there would be a waiting list. For example, at £50,000 the price
would rise, reducing the demand from F to E and increasing supply from f to E.
This market will tend to settle at a price of £100,000.
£,000
200
Supply
Excess Supply
(surplus)
H
h
150
100
Equilibrium price
f
F
50
Excess Demand
(shortage)
Demand
0
1,000
2,000
3,000
4,000
Quantity demanded & supplied per period of time
