Demand and supply: how does the price of strawberries at the Saturday bazaar settle at one point all by itself?

On Saturday morning farmers brought strawberries to the district bazaar. Nobody ordered them: «today sell a kilo at such-and-such a price». Even so, by midday the price at almost every stall had come to the same level. Who set this price? The answer: nobody on their own, buyers and sellers together. This is the topic promised in the first lesson: demand and supply.

What is demand?

Demand is the relationship showing how much of a good buyers are willing and able to buy at different prices. «Willing» (they want it) and «able» (they can afford it) must go together: a person who wants strawberries but has no money is not part of demand.

One rule works almost always: other things being equal, when the price rises buyers take less, and when the price falls they take more. When it gets more expensive, some limit themselves to half a kilo, and some do not buy at all.

Remember one subtle difference:

• Quantity demanded is the quantity at one specific price: «if a kilo costs 30 000 soum, they will buy 500 kg».
• Demand is the whole table: how much they would buy at each price.

What is supply?

Supply is the relationship showing how much of a good sellers are willing to sell at different prices. Here the direction is the opposite: when the price is high, more farmers bring their strawberries to the bazaar, and even one from a distant village can cover the cost of the trip. When the price is low, some prefer to use their strawberries for jam or to sell them elsewhere.

Where does the price stop?

A hypothetical picture of the bazaar (quantity in kilograms):

Only at one price, 30 000 soum, does the quantity buyers want to buy equal the quantity sellers want to sell: 500 kg. This is the equilibrium price. According to Britannica's definition, in equilibrium the quantity supplied by producers equals the quantity demanded by consumers. In a free market the price tends towards exactly this point.

Why does the price come exactly here? Let us look at the two extremes:

• If the price is 40 000 soum. Farmers brought 800 kg, buyers took 200 kg. Strawberries spoil quickly, and a seller with 600 kg left over starts lowering the price by midday. This is a surplus.
• If the price is 20 000 soum. Buyers ask for 900 kg, but there are 300 kg at the bazaar. A queue forms, the strawberries run out by ten o'clock, and latecomers say «I'll pay extra, save some for me». Sellers raise the price. This is a shortage.

In both cases the price moves by itself towards 30 000 soum.

Equilibrium has another advantage. In such a simple market the quantity sold equals the smaller of the two numbers: you cannot sell what the buyer does not take, and you cannot buy what the seller does not have. So the total trade at the bazaar is:

A very low price looks good for the buyer, but in fact many people are left without strawberries. At a very high price, the seller's goods rot.

Why does the price change from day to day?

You need to be able to tell two kinds of change apart:

1. If the quantity changes because the price changed, this is a move from one row of the table to another. Demand itself has not changed.
2. If some reason other than the price changes, the whole table is updated. In this case demand or supply itself changes.

Example: in the middle of the season strawberries ripened in every orchard, and at every price 300 kg more than before began to be brought to the bazaar. Buyers, meanwhile, are the same as before:

At yesterday's price of 30 000 soum, 300 kg are now left over, so the price falls to 25 000 soum and 700 kg of strawberries are sold at the bazaar. Supply increased, the price fell, the quantity sold rose. In the opposite case, for example if frost hits and the harvest is small, supply decreases and the price rises.

Practical tip. For a shop or café owner this table is not theory. If goods are sitting unsold for a long time, the price is above equilibrium. If goods run out quickly and customers leave empty-handed, the price is low or there is too little stock. In both cases money is lost.

Measuring how sharply buyers respond when the price changes is the topic of elasticity of demand. It comes in later lessons; for now you can read the article on the site «Does a discount increase revenue?».

In the next lesson

In the third lesson we will get to know the key terms of economics: need, resource, scarcity and opportunity cost.