Market Equilibrium Efficient?

Question:

Hello! I am trying to learn economics through YouTube videos and I don't really have a person to ask a question to so I figured I would give this a shot. My question is: isn't charging the market equilibrium price actually inefficient for producers sometimes? I was watching an explanation about market equilibrium, with the supply curve and the demand curve plotted on a graph with the equilibrium point at the intersection of the two curves. The example was that the price is at equilibrium when producers produce 2,000 pounds of apples and charge $2 per pound - producing more than 2,000 apples at that price results in oversupply and producing less apples at that price does not satisfy demand. Meanwhile, according to the graph, producing 4,000 pounds of apples and charging $4 per pound is a vast oversupply because only 1,000 pounds of apples would be demanded at that price. The solution, according to the video, would be to drop the price and the production down to $2 and 2,000 pounds of apples to reach equilibrium.

What seemed obvious to me, though, was that charging $2 per pound and selling 2,000 pounds of apples results in a gross earning of $4,000, while if the producer still charged $4 per pound and only produced the 1,000 pounds of apples that he could sell at that price he would still make $4,000. Why then should the producer work twice as hard by producing 2,000 to sell at $2 per pound when only producing 1,000 pounds of apples and selling them at a price of $4 earns the exact same amount of money? Both options are meeting the maximum demand for the apples at their respective price levels and making the same amount of money, so why should the producer strive to reach market equilibrium if that means, in this case, working twice as hard for the same profit? Wouldn't that be horribly inefficient?

Thank you for your time.

Answer:

Your question relates to what we teach in our Principles of Microeconomics courses: “The Law of Supply.” Indeed, producing 4,000 pounds of apples and charging $4 per pound creates a surplus in this specific market you describe. Note, though, that producing 1,000 pounds of apples and charging $4 per pound is not feasible for the producer in this market. According to the law of supply: “if the price of a good increases, the quantity supplied will increase too (other things remaining the same).” That’s why the supply curve is upwards sloping. Since the equilibrium quantity is 2,000 pounds and the equilibrium price is $2, if the price increases to $4, the quantity supplied will have to increase, too.

Furthermore, supplying only 1,000 pounds of apples when the market equilibrium quantity is 2,000 will create a shortage. This is when the “law of market forces” comes into place. I believe the video you were watching was hinting that concept. In that case, the price will rise to $2, the quantity demanded will decrease, the quantity supplied will increase, and the shortage will be eliminated at equilibrium. According to the law of market forces, when there is a shortage, the price rises, and when there is a surplus, the price falls.

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Last updated on
February 20, 2023

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