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don’t know which shops offer the best deals and don’t have time
for comparison shopping, sellers in tourist areas can charge dif-
ferent prices for the same good.
But in any market in which the buyers and sellers have both
been around for some time, sales and purchases tend to converge
at a generally uniform price, so we can safely talk about the mar-
ket price. It’s easy to see why. Suppose a seller offered a potential
buyer a price noticeably above what the buyer knew other peo-
ple were paying. The buyer would clearly be better off shopping
elsewhere — unless the seller were prepared to offer a better deal.
Conversely, a seller would not be willing to sell for significantly
Katharine Andriotis/Alamy less than the amount she knew most buyers were paying; she
would be better off waiting to get a more reasonable customer.
So in any well-established, ongoing market, all sellers receive,

Prices in a tourist market fluctuate widely because and all buyers pay, approximately the same price. This is what we
call the market price.
buyers can’t comparison shop, like they would in a well-
established market where prices tend to converge. Why does the Market Price Fall If It Is
Above the Equilibrium Price?

A market is in disequilibrium Figure 1.6-2 illustrates the lumber market in disequilibrium, meaning that the market
when the market price is above price differs from the price that would equate the quantity demanded with the quan-
or below the price that equates tity supplied. In this example, the market price of $1.50 is above the equilibrium price
the quantity demanded with the of $1. Why can’t the price stay there?
quantity supplied.

FIGURE 1.6-2 Price Above Its Equilibrium Level Creates a Surplus

Price of
lumber
(per board foot)
Supply
$2.00

1.75 Surplus
1.50

1.25
The market price of $1.50 is above
the equilibrium price of $1. This 1.00 E
places the market in disequilib-
rium and creates a surplus: at a 0.75
price of $1.50, producers would
like to sell 112 billion board feet 0.50 Demand
but consumers want to buy only
81 billion board feet, so there is a 0 70 81 100 112 130 150 170
surplus of 31 billion board feet. Quantity of lumber
This surplus will push the price (billions of board feet)
down until it reaches the equilib- Quantity Quantity
rium price of $1. demanded supplied

As the figure shows, at a price of $1.50, there would be more board feet of lumber
available than consumers wanted to buy: 11.2 billion board feet would be demanded
and 8.1 billion board feet would be supplied. When the quantity supplied exceeds the
quantity demanded, the difference between the quantity supplied and the quantity

48 Macro • Unit 1 Basic Economic Concepts
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

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