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Equilibrium: Mr.Demand, Meet Mr.SupplyThe beauty of the market is that the competing motivations of consumers and producers interact to arrive at a price and quantity for a product that determined by impersonal market forces. Having analyzed supply and demand separately, we now combine them to see how they determine the quantity of a good sold in a market and its price. To focus our thinking, let’s keep in mind a particular good – ice cream. Equilibrium
The graph below shows the market supply curve and market demand curve together. Notice that there is one point at which the supply and demand curves intersect; this point is called the market’s equilibrium. The price at which these two curves cross is called the equilibrium price, and the quantity is called the equilibrium quantity. Here the equilibrium price is $2.00 per cone, and the equilibrium quantity is 7 ice-cream cones. The dictionary defines the word ‘equilibrium’ as a situation in which various forces are in balance – and this also describes a market’s equilibrium. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is sometimes called the market-clearing price because, at this price, everyone in the market has been satisfied: buyers have bought all they want to buy, and sellers have sold all they want to sell. The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand. To see why, consider what happens when the market price is not equal to the equilibrium price.
Suppose first that the market price is above the equilibrium price, as in panel (a).
At a price of $2.50 per cone, the quantity of the good supplied (10 cones) exceeds the quantity demanded (4 cones). There is a surplus of the good: suppliers are unable to sell all they want at the going price. When there is a surplus in the ice-cream market, for instance, sellers of ice cream find their freezers increasingly full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their prices. Prices continue to fall until the market reaches the equilibrium. Suppose now that the market price is below the equilibrium price, as in panel (b). In this case, the price is $1.50 per cone, and the quantity of the good demanded exceeds the quantity supplied. There is a shortage of the good: Demanders are unable to buy all they want at the going price. When a shortage occurs in the ice-cream market, for instance, buyers have to wait in long lines for a chance to buy one of the few cones that are available. With too many buyers chasing too few goods, sellers can respond to the shortage by raising their prices without losing sales. As prices rise, the market once again moves toward the equilibrium. Thus, the activities of the many buyers and sellers automatically push the market price toward the equilibrium price. Once the market reaches its equilibrium, all buyers and sellers are satisfied, and there is no upward or downward pressure on the price. How quickly equilibrium is reached varies from market to market, depending on how quickly prices adjust. In most free markets, however, surpluses and shortages are only temporary because prices eventually move toward their equilibrium levels. Indeed, this phenomenon is so pervasive that it is sometimes called the law of supply and demand: The price of any good adjusts to bring the supply and demand for that good into balance. Ex. 1.Find words or phrases in the text which have the same meaning as the following: 1. A situation in which opposing forces, influences, etc. are balanced and under control; 2. equilibrium price; 3. a line that bends round; 4. an amount that remains after one has used all one needs; 5. a lack of sth needed; 6. an amount of money for which sth may be bought or sold; 7. moving, leading or pointing to a higher place, point or level; 8. moving, leading or pointing to what is lower or less important; 9. to become or to make sb/sth suited to new conditions; to adapt oneself/sth.
Ex. 2. Based on your understanding of the text, are the following TRUE or FALSE? 1. At the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. 2. There is no explanation why the equilibrium price is also called the market-clearing price. 3. Suppliers respond to the surplus by increasing their prices. 4. Sellers respond to the shortage by decreasing their prices without losing sales. 5. The price of any good adjusts to bring the supply and demand for that good into balance. Ex. 3.Find in the text information to answer the questions on the text. 1. What is called the market’s equilibrium? 2. What is the equilibrium price? 3. Why is the equilibrium price also called the market-clearing price? 4. Do the actions of buyers and sellers naturally move markets towards the equilibrium of supply and demand? How do suppliers and buyers respond to the market surplus and shortage of goods? Can we say that the actions of buyers and sellers naturally move markets towards the equilibrium of supply and demand? 5. What does the law of supply and demand say? Text 3 As you read the text, find out what the term “elasticity” is. Elasticity Consumers are more sensitive to some price changes than to others. You may not want to buy a car if its price goes up 10 percent. But if the price of salt goes up 10%, you will pay extra amount rather than go without salt. The degree to which changes in price cause changes in quantity demanded is called elasticity of demand. The number of cars demanded changes greatly as car prices change; so the demand for cars is highly elastic. The demand for salt is more inelastic: people buy nearly the same amount even though the price of salt changes. There are two basic reasons for elasticity of demand. The first concerns the relationship between income and the cost of the product. A car, for example, may easily cost 50% of your annual income. Salt probably costs less than 50% of your annual income. The smaller the proportion of your income that a product costs, the more inelastic is its demand. Demand tends to be more elastic if the good is a luxuary rather than a necessity. The second reason why demand is elastic concerns whether or not substitute product is available. Elasticity, a measure of how much buyers and sellers respond to changes in market conditions, allows to analyze supply and demand with greater precision. Economists use the term ’elasticity' to describe the responsiveness of one variable (demand) to another variable (price). The degree to which changes in price cause changes in quantity demanded is called the price elasticity of demand. The price elasticity of demand (ED) can be determined as follows:
This is defined as the percentage change in quantity demanded, divided by the percentage change in price. This value varies between zero and infinity. Three ranges are identified: — elastic, very responsive to price changes - greater than 1; — unit elasticity; — inelastic, not very responsive to price changes - less than 1.
Ex. 1. Based on your understanding of the text, are the following TRUE or FALSE? Explain why. 1. The concept of elasticity looks at how much one factor changes as a result of some other factor changing. 2. Elasticity, a measure of how much buyers respond to changes in market conditions, allows to analyze demand with greater precision. 3. The smaller the proportion of your income that a product costs, the more elastic is its demand. 4. Elasticity is a planning tool for managers.
Ex. 2. Answer the questions on the text. 1. What term do economists use to describe the responsiveness of one variable (demand) to another variable (price)? 2. What is called the price elasticity of demand? 3. What are two basic reasons for elasticity of demand? 4. What is the equation of the price elasticity of demand (ED)?
WRITING
Write an essay on the concept of elasticity as a measure of how much buyers and sellers respond to changes in market conditions. Illustrate it with the examples of your own.
TRANSLATION
A.Translate from English into Russian. Besides price elasticity of demand the following types of elasticity are particularly useful in a business context: Income elasticity of demand – the impact a change in income has on the quantity demanded. Advertising elasticity of demand – the impact a change in the amount spent on advertising has on the quantity demanded. Cross elasticity of demand – the impact a change in price of one product has on the quantity demanded of a second product. Elasticity is a planning tool for managers. It allows firms to ask ‘what if’ questions about their products, prices, advertising levels and so on. What will happen to our sales if we increase price by 10 p, or if we increase our advertising costs by 5%?
B. Translate from Russian into English. Основными элементами рыночного механизма являются спрос, предложение, цена и конкуренция. Спрос – это форма выражения потребности. Объем спроса или количество товаров определяется такими факторами как цена товара или услуги, доходы потребителей, вкусы покупателей, общее число покупателей данного товара и др. Одним из важнейших факторов, определяющих величину спроса, является цена товара или услуги. Максимальная цена, за которую покупатели готовы купить единицу товара в данный момент, есть цена спроса. Существует обратная связь между ценой и величиной спроса. Предложение – это количество товаров или услуг, которые предложены для реализации на рынке в определенный промежуток времени. Объем предложения зависит прежде всего от цены. Чем выше цена товара, тем прибыльнее его производство.
LISTENING
Negotiating on the Phone You’ll hear part of a telephone negotiation about the sale of yogurt between a salesperson and a buyer. Note down your answers to these questions: 1. What are they talking about? 2. What significant points were made? 3. Who made them? 4. What do you think the salesperson will do after the telephone conversation? 5. Is the fax below an accurate reflection of the phone call?
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