It was concluded earlier that if price rises above the equilibrium, there would be a shortage, while if it falls below the equilibrium there would be a surplus. There is a need to validate that is the appropriate parameter to be considered to refrain from falling into the state of surplus and shortage? It might be so, as the price changes affect both the buyers and the sellers. It would be better understood if we can know the reasons for price change during shortage and surplus.
A shortages brings about price rise
Say cost of energy bar is $1 per unit. Now, buyers strategize to purchase 15 million bars per week, and the sellers scheme 6 million bars per week to sell. The byers cannot compel the seller to trade more than they think of. So, amount of bars actually given out is 6 million per week for sale. In such cases, powerful forces function to hike the value and move it shift it towards equilibrium price.
Spotting the dissatisfaction of customers, few producers shall opt to hike up price while others shall promote hike in the output. In former case, because there was a price rise, the price of good moved towards equilibrium.
This way state of shortage is reduced as it decreases the demand and eventually increases the supply. When the trek in price has reached a position when there is no more of deficiency, the factors that operate for moving the price cease to operate, and the price reaches stagnation at its equilibrium.
An excess reduces the price
Say the price of the bar is $2, and producers have estimated to trade 13 million bars per week, while the consumers scheme to purchase 7 million bars every week. Now, in such cases producers cannot compel consumers to purchase in excess than they prefer to. So, the amount of bars sold off per week would be 7 million.
In such scenarios vital entities operate to reduce the price and shift it towards the equilibrium. Being not able to sell off the quantity of bars, they planned for some sellers shall now be enforced to bring out the per unit price of bar. Apart from that, producers also drop down the production. As price was cut down, it increased amount demanded and also, there was a scaling down of quantity supplied. This decline in price pushes price towards equilibrium and there is no longer an excess as well.
An agreement between Sellers and Buyers
When price of a good is lower than equilibrium, it pushed upwards. Now, there may arise a natural interrogation why don’t customers oppose the price rise and deny purchasing at increased price? They would instead refuse fulfil their demand at current price. This is because the customers rate the item more than its existing price. For instance, in few markets as the ones that function at eBay – the consumers can go extent of price raise, by proposing to buy goods at a higher rate.
Now, there might also be a reverse case, when cost is above equilibrium. So, wouldn’t the producers oppose this and deny the sale at the reduced price? The reason behind this is the fact that the minimum supplied price is lower than the current price, but with a constraint that the desired amount of goods cannot be sold at the existing price. Traders intentionally reduce the price to get market share.
The cost at which amount demanded and amount supplied equals stagnation is reached. Here neither the buyer not the seller can take advantage of the trade. Buyers buy the last unit of commodity at maximum price they can give, while sellers sell the last unit of item at minimum price feasible.
On the other hand, equilibrium is a junction at which this trade takes off at equilibrium price. It is the cost at which this demanded amount equals to supplied amount. This situation is achieved when ones who demand pursue to buy at lowest price feasible, and ones who supply targets to sell at highest price (possible). This price synchronises agenda of both sellers and buyers, none are privileged to alter it.