Market equilibrium

Every market is a kind of bargain between what buyers are willing to pay and what sellers are willing to accept. So the price is set by demand and supply together.

Table 9.3 shows mangoes demanded and supplied at three prices:

At ₹100, the quantity demanded equals the quantity supplied. This is market equilibrium (santulan). The equilibrium price is ₹100 and the equilibrium quantity is 12 kg. There is no pressure for the price to change, and the market is 'cleared': no shortage, no surplus.

On a graph (Fig. 9.7), equilibrium is where the demand curve crosses the supply curve: point E, at ₹100 and 12 kg.

"What if the price is not at equilibrium?" The market pushes it back:

• Price too low (₹40): buyers want 38 kg but only 6 kg is on offer. Shoppers compete for the few mangoes, so sellers raise the price.
• Price too high (₹150): sellers have 43 kg but buyers want only 8 kg. Mangoes pile up and start to spoil, so sellers cut the price.

Either way, the price moves towards ₹100.

"Does equilibrium really exist?" Ask yourself: can farmers grow exactly enough onions for 140 crore people, not a kilo more or less, every single day? In theory equilibrium is one point. In real life, technology, wages, interest rates, wars, political events, pandemics, weather and disasters keep shifting demand and supply. So equilibrium is never fixed: the market is always adjusting to a new one.

A pattern you can reuse in answers: "The market was at equilibrium. Then [something happened], so [demand or supply] changed, so the price moved to a new equilibrium."

The COVID-19 face masks (2020), in four stages:

• demand for masks surged suddenly;
• supply could not catch up at once, so prices rose sharply;
• over time, suppliers made more, and prices fell;
• once the pandemic was over, demand dropped further, and prices went back to pre-pandemic levels.

Dynamic pricing: a hotel in Goa with 100 rooms (p.205):

• ₹1,500 a night on an off-season weekday (a Monday in July);
• ₹8,000 on a tourist-season weekend (a Saturday in December);
• ₹25,000 on New Year's Eve.

If a group cancels, it may cut the price by 40% overnight to fill the empty rooms. It may change prices several times a day.

What makes the hotel change its price? Each reason is a sign of changing demand or supply:

• how fast rooms are getting booked;
• what nearby hotels charge;
• festivals, conferences or events nearby;
• weather forecasts;
• days left before arrival;
• past booking trends.

One more thought from the book: our choices today affect tomorrow's supply. Too much fast fashion, overfishing and overuse of groundwater can shrink future supply and shift the equilibrium. Short-term gain, or long-term sustainability?