Page 48 - 2023-bfw-Macro-Krugman-Econ-4e

ModULE 1.6
demanded is described as the surplus — also known as the excess supply. The difference AP ECoN TIP
®
of 3.1 billion board feet is the surplus of lumber at a price of $1.50. This surplus of
the quantity supplied over the quantity demanded that exists when the market is in Consider what you would do
disequilibrium should not to be confused with consumer surplus or producer surplus. if you were selling something
Consumer surplus and producer surplus constitute net gains from buying or selling a for a price that didn’t attract
good, and both can exist whether the market is in equilibrium or disequilibrium. enough buyers to purchase
This surplus means that some lumber producers are frustrated: at the current the quantity you chose to
price, they cannot find consumers who want to buy their lumber. The surplus offers an supply. If you would lower
incentive for those frustrated would-be sellers to offer a lower price in order to poach the price, you exemplify the
business from other producers and entice more consumers to buy. The result of this behavior that brings market
price cutting will be to push the prevailing price down until it reaches the equilibrium prices to equilibrium.
price. So the price of a good will fall whenever there is a surplus — that is, whenever the
market price is above its equilibrium level. There is a surplus of a good
or service when the quantity
Why does the Market Price Rise If It Is Below supplied exceeds the quantity
the Equilibrium Price? demanded. Surpluses occur
when the price is above its
Now suppose the price is below its equilibrium level — say, at $0.75 per board foot, as equilibrium level.
shown in Figure 1.6-3. In this case, the quantity demanded, 115 billion board feet,
exceeds the quantity supplied, 91 billion board feet, implying that there are would-be There is a shortage of a good
buyers who cannot find lumber: there is a shortage, also known as an excess demand, of or service when the quantity
24 billion board feet. demanded exceeds the quantity
supplied. Shortages occur when
the price is below its equilibrium
level.
FIGURE 1.6-3 Price Below Its Equilibrium Level Creates a Shortage

Price of
lumber
(per board foot)
Supply
$2.00
1.75

1.50

1.25
1.00 E
The market price of $0.75 is below
0.75 the equilibrium price of $1. This
Shortage creates a shortage: consumers
0.50 Demand want to buy 115 billion board feet,
but only 91 billion board feet are
0 70 91 100 115 130 150 170 for sale, so there is a shortage of
Quantity of lumber 24 billion board feet. This short-
(billions of board age will push the price up until
Quantity Quantity feet) it reaches the equilibrium price
supplied demanded
of $1.

When there is a shortage, there are frustrated would-be buyers — people who want
to purchase lumber but cannot find willing sellers at the current price. In this situa-
tion, either buyers will offer more than the prevailing price, or sellers will realize that
they can charge higher prices. Either way, the result is to drive up the prevailing price.
This bidding up of prices happens whenever there are shortages — and there will be
shortages whenever the price is below its equilibrium level. So the market price will rise
if it is below the equilibrium level.

Module 1.6 Market Equilibrium, Disequilibrium, and Changes in Equilibrium 49
Copyright © Bedford, Freeman & Worth Publishers.
Strictly for use with its products. For review purposes only. Not for redistribution.

02_APKrugman4e_40932_MacroU01_002_062.indd 49 05/07/22 10:51 AM