5.6. El enfoque de calidad total y el modelo de excelencia europeo
5.6.3. El Modelo de Excelencia Europeo: Estructura y Criterios
How does the market respond when it is not in equilibrium? Let’s look at two other prices for salmon shown on the y axis in Figure 3.9: $5.00 and $15.00 per pound.
At a price of $5.00 per pound, salmon is quite attractive to buyers but not very profi table to sellers—the quantity demanded is 750 pounds, represented by point B on the demand curve (D). However, the quantity supplied, which is represented by point A on the supply curve (S), is only 250. So at $5.00 per pound there is an excess quantity of 500 pounds demanded. This excess demand creates disequilibrium in the market.
When there is more demand for a product than sellers are willing or able to supply, we say there is a shortage. A shortage occurs whenever the quantity sup-plied is less than the quantity demanded. In our case, at a price of $5.00 there are three buyers for each pound of salmon. New shipments of salmon fl y out the door. This is a strong signal for sellers to raise the price. As the market price increases in response to the shortage, sellers continue to increase the quantity that they offer. You can see this on the graph in Figure 3.9 by following the upward-sloping arrow from point A to point E. At the same time, as the price rises, buyers will demand an increasingly smaller quantity, represented by the upward-sloping arrow from point B to point E along the demand curve. Even-tually, when the price reaches $10.00, the quantity supplied and the quantity demanded will be equal. The market will be in equilibrium.
What happens when the price is set above the equilibrium point—say, at
$15.00 per pound? At this price, salmon is quite profi table for sellers but not very attractive to buyers. The quantity demanded, represented by point C on the demand curve, is 250 pounds. However, the quantity supplied, repre-sented by point F on the supply curve, is 750. In other words, sellers provide 500 pounds more than buyers wish to purchase. This excess supply creates disequilibrium in the market. Any buyer who is willing to pay $15.00 for a pound of salmon can fi nd some since there are three pounds available for every customer. This situation is known as a surplus. A surplus, or excess supply, occurs whenever the quantity supplied is greater than the quantity demanded.
When there is a surplus, sellers realize that salmon has been oversupplied.
This is a strong signal to lower the price. As the market price decreases in response to the surplus, more buyers enter the market and purchase salmon.
This is represented on the graph in Figure 3.9 by the downward-sloping arrow moving from point C to point E along the demand curve. At the same time, sellers reduce output, represented by the downward-sloping arrow moving The equilibrium quantity is
the amount at which the quantity supplied is equal to the quantity demanded.
The law of supply and demand states that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.
A shortage occurs whenever the quantity supplied is less than the quantity demanded.
A surplus occurs whenever the quantity supplied is greater than the quantity demanded.
How Do Supply and Demand Shifts Affect a Market? / 95
from point F to point E on the supply curve. As long as the surplus persists, the price will continue to fall. Eventually, the price will reach $10.00 per pound. At this point, the quantity supplied and the quantity demanded will be equal and the market will be in equilibrium again.
In competitive markets, surpluses and shortages are resolved through the process of price adjustment. Buyers who are unable to fi nd enough salmon at
$5.00 per pound compete to fi nd the available stocks; this drives the price up.
Likewise, businesses that cannot sell their product at $15.00 per pound must lower their prices to reduce inventories; this drives the price down.
Every seller and buyer has a vital role to play in the market. Venues like the Pike Place Market bring buyers and sellers together. Amazingly, all of this happens spontaneously, without the need for government planning to ensure an adequate supply of the goods that consumers need. You might think that a decentralized system would create chaos, but nothing could be further from the truth. Markets work because buyers and sellers can rap-idly adjust to changes in prices. These adjustments bring balance. When markets were suppressed in communist command economies during the twentieth century, shortages were commonplace, in part because there was no market price system to signal that additional production was needed. (A command economy is one in which supply and price are regulated by the government rather than by market forces.) This led to the creation of many black markets (see Chapter 5).
How do markets respond to additional demand? In the case of the bowl-ing cartoon shown above, the increase in demand comes from an unseen customer who wants to use a bowling lane already favored by another patron.
An increase in the number of buyers causes an increase in demand. The lane is valued by two buyers, instead of just one, so the owner is contemplating a price increase! This is how markets work. Price is a mechanism to determine which buyer wants the good or service the most.
In summary, Figure 3.10 provides four examples of what happens when either the supply or the demand curve shifts. As you study these, you should develop a sense for how price and quantity are affected by changes in sup-ply and demand. When one curve shifts, we can make a defi nitive statement about how price and quantity will change. In the chapter appendix that fol-lows, we consider what happens when supply and demand change at the same time. There you will discover the challenges in simultaneously deter-mining price and quantity when more than one variable changes.
96 / CHAPTER 3 The Market at Work
Price and Quantity When Either Supply or Demand Changes
FIGURE 3.10
Change Illustration Impact on price and quantity
1. Demand increases;
supply does not
change. Price
Quantity D1
D2 S
E2
E1
The demand curve shifts to the right.
As a result, the equilibrium price and the equilibrium quantity increase.
2. Supply increases;
demand does not change.
Price
Quantity D E2
S1
E1
S2
The supply curve shifts to the right.
As a result, the equilibrium price decreases and the equilibrium quantity increases.
3. Demand decreases;
supply does not change.
D1 E1
E2 Price
Quantity D2
S The demand curve shifts to the left.
As a result, the equilibrium price and the equilibrium quantity decrease.
4. Supply decreases;
demand does not change.
S1
D E1 Price
Quantity S2
E2
The supply curve shifts to the left.
As a result, the equilibrium price increases and the equilibrium quantity decreases.
How Do Supply and Demand Shifts Affect a Market? / 97
ECONOMICS FOR LIFE
There is an old adage in real estate, “location, loca-tion, location.” Why does location matter so much?
Simple. Supply and demand. There are only so many places to live in any given location—that is the sup-ply. The most desirable locations have many buy-ers who’d like to purchase in that area—that is the demand.
Consider for a moment all of the variables that can infl uence where you want to live. As you’re shopping for your new home, you may want to consider proximity to where you work, your favorite restaurants, public transportation, and the best schools. You’ll also want to pay attention to the crime rate, differences in local tax rates, traffi c con-cerns, noise issues, and nearby zoning restrictions.
In addition, many communities have restrictive covenants that limit how owners can use their property. Smart buyers determine how the covenants work and whether they would be happy to give up some freedom in order to maintain an attractive neighborhood. Finally, it is always a good idea to visit the neighborhood in the evening or on the weekend to meet your future neighbors before you buy. All of these variables determine the demand for any given property.
Once you’ve done your homework and settled on a neighborhood, you will fi nd that property values can vary tremendously across very short distances. A home along a busy street may sell for half the price of a similar property that backs up to a quiet park a few blocks away. Properties near a subway line command a premium, as do properties with views or close access to major employers and amenities (such as parks, shopping centers, and places to eat). Here is the main point to remember, even if some of these things aren’t important to you: when it comes time to sell, the location of the home will always mat-ter. The number of potential buyers depends on the characteristics of your neighborhood and the size and
condition of your property. If you want to be able to sell your place easily, you’ll have to consider not only where you want to live now but who might want to live there later.
All of this discussion brings us back to supply and demand. The best locations are in short supply and high demand. The combination of low supply and high demand causes property values in those areas to rise. Likewise, less desirable locations have lower property values because demand is relatively low and the supply is relatively high. Since fi rst-time buyers often have wish lists that far exceed their budgets, considering the costs and benefi ts will help you fi nd the best available property.
There is a popular HGTV show called Property Virgins that follows fi rst-time buyers through the process of buying their fi rst home. If you have never seen the show, watching an episode is one of the best lessons in economics you’ll ever get. Check it out, and remember that even though you may be new to buying property, you still can get a good deal if you use some basic economics to guide your decision.