Managerial Economics

Author: Sun Duoyong
Publisher:
Publish Date: 2002-09-01
Features: Section 3 introduces the basic principles of market equilibrium, demand, and supply, providing a framework for analyzing the behavior of buyers and sellers in the market. The law of demand reflects the impact of market prices and other factors on consumers' purchasing decisions, while the law of supply reflects the influence of market prices and other factors on suppliers' behavior. When demand and supply meet in the market, what happens? The interaction between the two leads to market equilibrium. Let's briefly analyze this process.
Market Equilibrium and the Formation of Market Prices
If at a certain price, the quantity demanded by buyers equals the quantity supplied by sellers (i.e., demand equals supply), the market is said to be in equilibrium (Equilibrium), and this price is called the equilibrium price. The corresponding transaction volume is called the equilibrium quantity. To analyze this process, we compare the demand and supply conditions discussed earlier, as shown in Table 2—5 and Figure 2—7. Clearly, the equilibrium price here is 5 yuan. At a market price of 5 yuan, the quantity supplied equals the quantity demanded, i.e., 6,000 units. When the market price is greater than 5 yuan, the quantity demanded is less than the quantity supplied, leading to a surplus (supply exceeds demand). In this case, sellers will naturally lower prices. Those who do not reduce their prices will end up with excess inventory. Competition among sellers will drive the price down to the equilibrium level. When the market price is less than 5 yuan, the quantity demanded exceeds the quantity supplied, leading to a shortage (demand exceeds supply). In this scenario, some consumers may not be able to purchase the goods they need. Shortages will incentivize consumers to raise prices, and competition among buyers will push the price back up to the equilibrium level. At the equilibrium price, consumers can buy all the goods they need, and producers can sell all the goods they produce, meaning both buyers and sellers are satisfied. This situation is referred to as market clearing (Market clearing), and thus, the equilibrium price is also called the market-clearing price.
Now, let's summarize the behavior of market equilibrium. In a free-market economy, the forces of supply and demand generally push prices toward equilibrium. At the equilibrium price, the quantity supplied equals the quantity demanded. This mechanism is called the law of supply and demand. It is evident that although both supply and demand are influenced by price, neither can independently determine the price. The true market price is the result of the combined effect of these two mechanisms. In practice, the process of adjusting supply and demand quantities through price fluctuations to ultimately reach market equilibrium may be simple or complex.
The simplest process is an auction, where buyers and sellers can immediately respond to shortages or surpluses through bids. In most commodity markets, there are often intermediaries between initial producers and final consumers, making the interaction between supply and demand a longer response process. It should be noted that:
First, the analysis here focuses on the equilibrium of the entire market, not the equilibrium of a single firm's product market.
Second, the market equilibrium discussed here is based on the assumption of perfect competition and applies to most commodity markets. However, when imperfect competition exists, the situation becomes more complex.
Third, the equilibrium state described above is achieved under the condition that all other factors affecting demand and supply, except for price, remain constant. When these other factors change, the original market equilibrium is disrupted, and a new equilibrium is approached through shifts in the demand or supply curve.
Since there are many factors influencing demand and supply, and they are often in constant flux, market equilibrium is continuously disturbed, leading to a process of shifting from the original equilibrium to a new one.
| Price | Quantity Demanded | Quantity Supplied | Surplus Supply |
|-------|-------------------|-------------------|----------------|
| 10 | 1,000 | 12,000 | 11,000 |
| 9 | 2,000 | 10,800 | 8,800 |
| 8 | 3,000 | 9,600 | 6,600 |
| 7 | 4,000 | 8,400 | 4,400 |
| 6 | 5,000 | 7,200 | 2,200 |
| 5 | 6,000 | 6,000 | 0 |
| 4 | 7,000 | —4,800 | —2,200 |
| 3 | 8,000 | 3,600 | —4,400 |
| 2 | 9,000 | 2,400 | —6,600 |
| 1 | 10,000 | 1,200 | —8,800 |
Consumer Surplus and Producer Surplus
Once the market price is formed, all producers sell at this price, regardless of their production costs, and all consumers purchase goods at this price, regardless of how much they were originally willing to pay. From the demand side, some consumers who were initially willing to pay higher prices (e.g., 6 yuan, 7 yuan, 8 yuan, etc.) for DVDs end up buying them at the equilibrium price (5 yuan). The actual price they pay is lower than what they were originally willing to pay, and this difference is gained by consumers, known as consumer surplus. From the supply side, some suppliers may have initially intended to sell at lower prices (e.g., 4 yuan, 3 yuan) due to cost differences. However, they now sell at the equilibrium price (5 yuan) and also benefit, which is called producer surplus.
The Role of Market Mechanisms
Market mechanisms primarily operate through the price system. In the market system, supply and demand determine prices, and prices, in turn, react to supply and demand in the market, influencing the changes in demand and supply and playing a coordinating role in achieving equilibrium. The market coordinates individuals and organizations engaged in different jobs and pursuing various goals through the price mechanism. Countless markets conduct countless transactions of goods and services, determining their prices. The entire price system guides the flow of resource use by providing price information at lower costs, higher speeds, and greater efficiency, directing economic resources toward areas that can generate economic profits.
Fluctuations in Market Equilibrium
In a market economy, prices are constantly changing, and these changes are driven by shifts in supply and demand. As discussed earlier, various factors determine supply and demand, such as income, consumer preferences, prices of related goods, production technology, production costs, government policies, etc. Changes in any of these factors will cause shifts in supply and demand, leading to fluctuations in market prices.
Demand and supply analysis not only explains the formation of equilibrium prices and equilibrium quantities but also helps managers predict the impact of changes in economic conditions on prices and sales volume. This prediction can be either qualitative (predicting the direction of economic changes in demand) or quantitative (predicting the range of changes in economic variables). Of course, quantitative predictions may be difficult to achieve due to limited information, but even qualitative predictions about the direction of price and quantity changes can be highly valuable for managers in determining corporate development strategies.
For example, if the government plans to abolish the preferential tax rate system of "pay first, return later" and adopt a uniform tax rate for all enterprises, you need to analyze how this policy change will affect your products and sales volume, helping you formulate appropriate responses. Let's briefly analyze this fluctuation.
1. The Impact of Demand Changing Alone
Under constant supply, a change in demand positively affects the market equilibrium price. That is, an increase in demand leads to a higher equilibrium price and an increase in equilibrium quantity, while a decrease in demand results in a lower equilibrium price and a decrease in equilibrium quantity. See Figure 2—8 for illustration. For instance, if the supply of commercial housing remains unchanged, a decrease in savings interest rates and positive expectations for real estate will increase demand for commercial housing, shifting the demand curve to the right. This will lead to higher housing prices and sales volume. Conversely, during economic downturns and income declines, consumer demand for commercial housing will decrease, resulting in lower housing prices and sales volume.