There are two sides to a marketa buying or demand side and a selling or supply side.

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There are two sides to a market—a buying or demand side and a selling or supply side. Since most of us buy many more goods and services than we sell, let’s consider the price a buyer pays for a good or service.

There are two kinds of prices—equilibrium prices and disequilibrium prices. If equilibrium price exists in a market for a good, then the quantity of the good that buyers want to buy is equal to the quantity of the good that sellers want to sell. If a disequilibrium price exists, then either the quantity of the good that buyers want to buy is greater than or less than the quantity that sellers want to sell. In other words, either a shortage or surplus of the good exists in the market.

If the disequilibrium price is below the equilibrium price (e.g., the equilibrium price is \($10\) and the disequilibrium price is \($7),\) then a shortage of the good exists. If the disequilibrium price is above the equilibrium price (e.g., the equilibrium price is \($10\) and the disequilibrium price is \($14),\) then a surplus of the good exists.

So, let’s take our original question—Does it matter to you if you pay equilibrium prices or not?—and ask instead, Does it matter to you if either shortages or surpluses in the market matter to you as a buyer?

If a shortage exists, this means that you, as a buyer, may be willing to buy the good, but be unable to buy it. After all, when there is a shortage of a good, it holds that some buyers are going to be unable to buy the good. You may want to buy the bread, but you can’t; you may want to buy the medicine, but you can’t; you may want to buy the car, but you can’t.

Now if a surplus exists, this means that you, as a buyer, will pay more for the good you are buying than you would have paid at equilibrium. What this translates into is less consumers’ surplus for you. Remember, consumers’ surplus is the difference between the maximum price you are willing to pay for a good and the price you pay. When equilibrium price is, say, \($10,\) and the maximum price you are willing to pay is \($15,\) you receive \($5\) worth of consumers’ surplus. But when the price you pay is above equilibrium, say, \($12,\) and the maximum price you are willing to pay is \($15,\) then you receive \($3\) worth of consumers’ surplus.

Once again, does it matter to you if you pay equilibrium price or not? It matters quite a lot because if you don’t pay equilibrium price you may not be able to buy the good you want to buy (the case when a shortage exists) or you end up with less consumers’ surplus (the case when a surplus exists).

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Microeconomics

ISBN: 9781337617406

13th Edition

Authors: Roger A Arnold

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