Using Equilibrium to Describe Markets

We have now seen that a market tends to have a single price, the equilibrium price. If the market price is above the equilibrium level, the ensuing surplus leads buyers and sellers to take actions that lower the price. And if the market price is below the equilibrium level, the ensuing shortage leads buyers and sellers to take actions that raise the price. So the market price always moves toward the equilibrium price, the price at which there is neither surplus nor shortage.

!worldview! ECONOMICS in Action: The Price of Admission

The Price of Admission

The market equilibrium, so the theory goes, is pretty egalitarian because the equilibrium price applies to everyone. That is, all buyers pay the same price—the equilibrium price—and all sellers receive that same price. But is this realistic?

The market for concert tickets is an example that seems to contradict the theory—there’s one price at the box office, and there’s another price (typically much higher) for the same event online where people who already have tickets resell them, such as StubHub.com or eBay. For example, compare the box office price for a Drake concert in Miami, Florida, to the StubHub.com price for seats in the same location: $88.50 versus $155.

The competitive market model determines the price you pay for concert tickets.
Frazer Harrision/Getty Images

Puzzling as this may seem, there is no contradiction once we take opportunity costs and tastes into account. For major events, buying tickets from the box office means waiting in very long lines. Ticket buyers who use online resellers have decided that the opportunity cost of their time is too high to spend waiting in line. And tickets for major events being sold at face value by online box offices often sell out within minutes. In this case, some people who want to go to the concert badly but have missed out on the opportunity to buy cheaper tickets from the online box office are willing to pay the higher online reseller price.

Not only that—at StubHub.com, you can see that markets really do move to equilibrium. You’ll notice that the prices quoted by different sellers for seats close to one another are also very close: $184.99 versus $185 for seats on the main floor of the Drake concert. As the competitive market model predicts, units of the same good end up selling for the same price. And prices move in response to demand and supply.

According to an article in the New York Times, tickets on StubHub.com can sell for less than the face value for events with little appeal, but prices can skyrocket for events that are in high demand. (The article quotes a price of $3,530 for a Madonna concert.) Even StubHub.com’s chief executive says his site is “the embodiment of supply-and-demand economics.”

So the theory of competitive markets isn’t just speculation. If you want to experience it for yourself, try buying tickets to a concert.

Quick Review

  • Price in a competitive market moves to the equilibrium price, or market-clearing price, where the quantity supplied is equal to the quantity demanded. This quantity is the equilibrium quantity.

  • All sales and purchases in a market take place at the same price. If the price is above its equilibrium level, there is a surplus that drives the price down to the equilibrium level. If the price is below its equilibrium level, there is a shortage that drives the price up to the equilibrium level.

3-3

  1. Question 3.3

    In the following three situations, the market is initially in equilibrium. Explain the changes in either supply or demand that result from each event. After each event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result?

    1. 2013 was a very good year for California wine-grape growers, who produced a bumper crop.

    2. After a hurricane, Florida hoteliers often find that many people cancel their upcoming vacations, leaving them with empty hotel rooms.

    3. After a heavy snowfall, many people want to buy second-hand snowblowers at the local tool shop.

Solutions appear at back of book.