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Supply & Demand

Supply & Demand

Equilibrium Price

As useful (and fascinating) as supply and demand curves are on their own, they become even more valuable (and for economists, truly sublime) when combined. When we plot supply and demand for a product on the same graph, we discover how producers and consumers will interact in the marketplace—and where exactly they will converge.

Remember the demand curve looked like this.

Demand Curve 1

And the supply curve looked like this.

Supply Curve 1

Now look at what happens when we combine these graphs (and add a little curviness, just to make things sexy).

Supply and Demand Curve 1

They intersect a t a certain point. They intersect at the price where the amount producers are willing and able to supply converges with the amount consumers are willing and able to purchase. This point of convergence is called the equilibrium price. Theoretically it is where supply and demand meet and prices settle. If suppliers ignore demand, and continue to produce units and price them too high, they will not be purchased. Instead they will sit in the warehouse. If they produce too few, demand will go unmet and consumers will clamor for more.

This clamoring for more goods might encourage new suppliers to enter the market. And as we noted above, the entrance of new competitors will increase supply. And when this occurs the market will settle on a new equilibrium price.

Supply and Demand Curve 2

If factors such as the introduction of new technology or decreasing production costs shift the supply curve to the right (S2) or if other factors such as new government regulations or increasing production costs shift the supply curve to the left (S3) the market will produce a new equilibrium price.

Supply and Demand Curve 3

Similarly, if demand shifts for any reason (the changing price of substitution or complementary goods, changing income, etc.) the market will generate a new equilibrium price.

Supply and Demand Curve 4

Why It Matters Today

What's the equilibrium point for an iPhone?  Each time a new model comes out, it seems, Apple ends up with production shortages.  That implies that the sticker price Apple is charging may be too low.  But the company may have other reasons for selling below the equilibrium price... such as not wanting the price for the phones end up too high a few months later, once the initial frenzy has worn off. 

Check out this handy chart of iPhone prices over time.

If you were in charge of unveiling the next iPhone, what would you charge? What information would you need to have available to know the best price?

Sometimes, a Song Says it Better: Reno, by Bruce Springsteen

According to Bruce Springsteen, there is a price for everything.

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