Setting the Stage

The 8-Track Tape Market

Although the information takes a little time to compile, the buying and selling inclinations of these "tracksters" can be illustrated by a graph that combines the buyers' demand curve with the sellers' supply curve. The graph in the exhibit at the right is the result.

A few observations about this graph are in order:

• First, the demand curve is negatively sloped--higher prices correspond with smaller quantities. This negative slope indicates the law of demand.

  Moving along the demand curve, a 90-cent price generates a quantity demanded of 0 tapes. A 10-cent price, in contrast, leads to a quantity demanded of 800 tapes.



• Second, the supply curve is positively sloped--higher prices correspond with larger quantities. This positive slope indicates the law of supply.

  Moving along the supply curve, a 10-cent price generates a quantity supplied of 0 tapes and a 90-cent price gives us a quantity supplied of 800 tapes.

What If?

• 30 Cents: Consider first a 30 cent. Click the [30 Cent] button to highlight this price. At this price, the quantity demanded is 600 tapes and the quantity supplied is 200 tapes. This does not seem to be equilibrium. The buyers cannot buy all that they want. They want to buy 600 tapes, but only 200 tapes are offered for sale by the sellers. This situation, termed a shortage, actually motivates buyers to change the price, to offer a higher price. But equilibrium means that the price does not change. This price is NOT equilibrium.


• 70 Cents: Now consider a 70 cent. Click the [70 Cent] button to highlight this price. At this price, the quantity demanded is 200 tapes and the quantity supplied is 600 tapes. This does not seem to be equilibrium, either. But now the sellers cannot sell all that they want. They want to sell 600 tapes, but only 200 tapes are purchased by the buyers. This situation, termed a surplus, motivates sellers to change the price, to charge a lower price. But once again, equilibrium means that the price does not change. This price is NOT equilibrium either.

Neither price is suitable. Either the buyers are not able to buy what they want or the sellers are not able to sell what they have. This market is not in equilibrium at either price. One side or the other is left wanting, which prompts the unsatisfied side to take corrective action, action that alters the price. A changing price is a sure sign that the market is not at equilibrium.

Equilibrium?

What about a 50 cent price? Click the [50 Cent] button to highlight this price. At this price, the demand curve and supply curve intersect. The quantity demanded is 400 tapes and the quantity supplied is 400 tapes. This looks promising. The buyers can buy all that they want. The sellers can sell all that they want. Neither buyers nor sellers are motivated to change the price. The forces of demand and supply appear to be in balance.