Macroeconomics

‭As‬‭demanders‬‭compete‬‭against‬‭each‬‭other‬‭for‬‭the‬‭limited‬‭supply,‬‭the‬‭price‬‭tends‬‭to‬‭rise.‬‭As‬‭price‬‭starts‬ ‭to rise, two things happen:‬ ‭1.‬ ‭Some‬ ‭consumers‬‭stop‬‭demanding‬‭the‬‭good‬‭at‬‭higher‬‭prices‬‭because‬‭they‬‭might‬‭not‬‭be‬‭able‬‭to‬ ‭afford it or can replace it with cheaper ones. This reduces Qd.‬ ‭2.‬ ‭Qs‬ ‭increases‬ ‭as‬ ‭suppliers‬ ‭fnd‬ ‭themselves‬ ‭receiving‬ ‭a‬ ‭higher‬ ‭price‬ ‭for‬ ‭their‬ ‭product‬ ‭and‬ ‭shift‬ ‭additional resources to produce it.‬ ‭This‬‭process‬‭continues‬‭until‬‭the‬‭shortage‬‭is‬‭eliminated‬‭since‬‭the‬‭market‬‭naturally‬‭adjusts‬‭itself‬‭back‬‭to‬ ‭equilibrium at point X.‬ ‭This‬‭scenario‬‭applies‬‭to‬‭the‬‭mechanism‬‭of‬‭an‬‭auction‬‭where‬‭at‬‭frst,‬‭the‬‭item‬‭represents‬‭the‬‭limited‬‭Qs‬‭at‬ ‭a‬ ‭low‬‭price‬‭that‬‭allows‬‭many‬‭people‬‭to‬‭bid‬‭for‬‭it.‬‭There‬‭is‬‭a‬‭shortage‬‭since‬‭many‬‭people‬‭want‬‭the‬‭item‬ ‭but‬ ‭only‬ ‭one‬ ‭is‬ ‭being‬ ‭sold.‬ ‭As‬ ‭potential‬ ‭buyers‬ ‭offer‬ ‭higher‬ ‭prices,‬ ‭some‬ ‭bidders‬ ‭drop‬ ‭out‬ ‭until‬ ‭the‬ ‭person‬ ‭who‬ ‭offers‬ ‭the‬‭highest‬‭price‬‭gets‬‭the‬‭item.‬‭In‬‭other‬‭words,‬‭prices‬‭rise‬‭until‬‭quantity‬‭demanded‬ ‭and quantity supplied are equal.‬ ‭Excess‬‭supply‬‭or‬‭surplus‬ ‭occurs‬‭when‬ ‭quantity‬‭supplied‬‭exceeds‬‭quantity‬‭demanded‬ ‭at‬‭a‬ ‭price‬‭that‬ ‭is‬ ‭higher‬ ‭than‬ ‭the‬ ‭equilibrium‬ ‭price‬ ‭.‬ ‭It‬ ‭indicates‬ ‭that‬ ‭the‬ ‭price‬ ‭set‬ ‭by‬ ‭suppliers‬ ‭is‬ ‭too‬ ‭high‬ ‭for‬ ‭consumers who refuse to buy at this price level.‬

‭Table 6: Market Disequilibrium - Excess Supply‬ ‭Price of a Tablet ($)‬

‭Quantity of Tablets Demanded‬

‭Quantity of Tablets Supplied‬

‭80‬

‭700‬

‭100‬

‭100‬

‭600‬

‭200‬

‭120‬

‭500‬

‭300‬

‭140‬

‭400‬

‭400‬

‭160‬

‭300‬

‭500‬

‭180‬

‭200‬

‭600‬

‭200‬

‭100‬

‭700‬

‭In‬‭this‬‭schedule,‬‭excess‬‭supply‬‭occurs‬‭at‬‭the‬‭price‬‭of‬‭$160,‬‭$180,‬‭and‬‭$200‬‭where‬‭there‬‭is‬‭a‬‭surplus‬‭of‬ ‭200, 400, and 600 units respectively.‬

‭On the demand-supply diagram, excess supply is represented above the equilibrium point as follows:‬

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