LESSON 7

1. Ere phrases (to be written out from the English text) for translation by ear.

Revise the topical vocabulary concentrating on the underlined parts of the text.

Make sure you will be able to translate these from Russian into English.

MARKET EQUILIBRIUM

It's easy to train economists. Just teach a parrot to say "Supply and Demand”. Thomas Carlyle

Buyers and sellers use prices to signal their re­spective wants and then exchange money for goods or resources, or vice versa. You accept or reject thousands of offers during every trip to a shopping center or perusal of a newspaper. Prices efficiently transmit incredible amounts of information that is relevant for decisions to buy or sell and make a lot of other information (or misinformation) irrelevant. For example, dur­ing the nineteenth century, Ghanians exported cocoa to England, believing that the British used it for fuel. Their mistake was not a problem, however, because their decision to produce de­pended on the price of cocoa, not its final use. Supply and demand jointly determine prices and quantities so that markets achieve equilibrium.

In an equilibrium, any pressures for change must be offset by opposing forces.

All sciences, including economics, use this pow­erful concept extensively. Astronomers, for ex­ample, describe the moon as following a fairly stable equilibrium path as it circles our earth. But what creates an equilibrium in a market?

Suppose every potential buyer and seller of a good submitted demand and supply schedules to an auctioneer, who then calculated the price at which the quantities demanded and supplied were equal. All buyers' demand prices (the max­imum they are willing to pay) and all sellers' sup­ply prices (the minimum they will accept per unit for a given amount) are equal. There is mar­ket equilibrium, so the market clears.

Market equilibrium occurs at the price-quantity combination where the quantities demanded and supplied are equal.

The amounts buyers will purchase at the equi­librium price exactly equal the amounts produc­ers are willing to sell. Let's examine the sense in which this is an equilibrium.

Figure 11 summarizes the market supplies and demands for paperbacks. (Note that there are more buyers and sellers than in our earlier examples.) After studying the supply and de­mand schedules, our auctioneer ascertains that at $5 per book the quantities demanded and sup­plied both equal 300 million books annually. Sellers will provide exactly as many novels as readers will buy at this price, so the market clears.

But what if the auctioneer set a price of $6 per book, or $4 per book? First, let us deal with the problem of a price set above equilibrium.

A surplus is the excess of the quantity supplied over quantity demandedwhen the price is above equilibrium.

At $6 per book, publishers would print 400 mil­lion books annually, but readers would only buy 200 million books. The surplus of 200 million books shown in Figure 11 would wind up as ex­cess inventories in the hands of publishers.

Most firms would cut production as their inventories grew, and some might cut prices, hoping to unload surplus paperbacks on bar­gain hunters. (Publishers call this remainder-Ing.) Other firms with swollen inventories would join in the price war. Prices would fall until all surplus inventories were depleted. Some firms might stop production as prices fell; others might permanently abandon the publishing in­dustry.

How much the quantity supplied would de­cline is shown in the table accompanying Figure 11. When the price falls to $5 per book, con­sumers will buy 300 million books annually, while publishers will supply 300 million books; the quantity demanded equals the quantity sup­plied. The market-clearing price is $5 per book. At this market equilibrium, any pressures for price or quantity changes are exactly counter­balanced by opposite pressures.

A shortage is created when the price is below equilibrium.