If the price of gas is $2.00 per liter, people may be willing and able to purchase 50 liters per week, on average. If the price drops to $1.75 per liter, they may be able to buy 60 liters. At $1.50 per liter, they may be prepared to purchase 75 liters. Note that while some gas usage is essential – driving to work, for example – some use is optional. Therefore, as gas prices drop, people may choose to make more optional trips during weekends, and so on.
The resulting demand schedule for gas looks like this.
|Buyer Demand per Consumer |
|Price per liter |Quantity ...view middle of the document...
20 |50 |
|$1.30 |60 |
|$1.50 |75 |
|$1.75 |95 |
|$2.15 |120 |
At a low price of $1.20 per liter, suppliers are willing to provide only 50 liters per consumer per week. If consumers are willing to pay $2.15 per liter, suppliers will provide 120 liters per week. The question is this: what prices are needed to convince producers to offer various quantities of a product or service?
As price rises, the quantity supplied rises as well. As price falls, so does supply. This is a "direct" relationship, and the supply curve has an upward slope like this:
At $1.20 per liter, consumer demand exceeds supply, and there's a shortage of gas in the market. Shortages tend to drive up the price, because consumers compete to purchase the product. However, when prices go up too much, demand decreases, even though the supply may be available. Consumers may start to purchase substitute products, or they simply may not purchase anything. This creates a surplus. To eliminate the surplus, the price goes down and consumers start buying again. In this manner, equilibrium is usually maintained quite efficiently.
14. Assume initially that the demand and supply for premium coffees (one-pound bags) are in equilibrium. Now assume Starbucks introduces the world to premium blends, and so...