Introduction
As consumers, we desire products and services to be available when we need them. Similarly, suppliers aim to produce the exact amount of product that will be demanded. Any surplus product just takes up space and will eventually be sold at a discount. Conversely, any shortage of products will cause consumers to be disgruntled.
The Dance of Supply and Demand
Supply and demand act together, where suppliers aim to charge the highest price possible, while buyers aim to pay the lowest price possible. They negotiate until they hit an equilibrium price in the middle. This is the point where quantity demanded equals quantity supplied, and that’s when people start to buy, because that’s the price that they’ll accept.
Market Equilibrium Price and Quantity
In the market equilibrium, buyers want to pay the lowest price possible. For instance, they would be comfortable paying $1.00 per unit per kilogram. However, for sellers, $7.00 is the best price to sell at because they’ll make the most profit. But they have to negotiate to be in the middle of $4.00, and that’s when quantity demanded equals quantity supplied.
Shifts in Demand and Supply
If supply decreases, the supply curve will shift left, and then the new equilibrium will have a higher price and a lower quantity.
Surplus and Shortage
Above equilibrium is called surplus. That means that supply is greater than demand, so there is too much product, and a lot of the time, that stuff doesn’t get sold. This becomes a risk if you have surplus inventory, as it may never get sold, and inventory that can’t be sold is worthless.
Shortage is when there’s too much demand, so demand is greater than supply, and there’s not enough supply. This eventually drives prices up in the long run.
The Art of Negotiation
This is how negotiations work. For example, if you’re a worker, you have to negotiate with your employer for salary. The employer wants to pay as little as possible while you want to earn as much as possible, so you have to meet in the middle. In negotiation, you don’t win 100%, you have to lose a little, but you both should be happy in that situation.
Conclusion
Market equilibrium is very important. You learn a lot about negotiation. It’s highly recommended to track the course calendar, watch these videos, reflect on the material learned, and complete the exercise at the end of the chapter. Do as much practice as possible in the textbook.