The actions of buyers and sellers are generally completely independent of each other. When the supply and demand curves cross, an equilibrium price is reached and the buyers' and sellers' actions are coordinated. We ask two questions of supply/demand curves:
- How does each half of the market respond?
- Whose plans are satisfied?
Surplus: at a particular price when the quantity supplied exceeds the quantity demanded
Shortage: at a particular price when the quantity demanded exceeds the quantity supplied
During a surplus, buyers are satisfied because the price of a certain good or service decreases. Sellers aren't satisfied because they must cut their prices during surpluses. During a shortage, the seller is satisfied because the price of a particular good or service increases. Buyers aren't satisfied because sellers raise their prices during shortages. High prices signify that a good is relatively scarce. When prices are increasing, a shortage is being alleviated. Low prices signify that a good is relatively abundant. When prices are decreasing, a surplus is being alleviated.
Regardless of price fluctuation, there's a competitive plan between buyers and sellers to reach an equilibrium. This is because they don't compete with one another, they work together. Buyers compete with other buyers and sellers compete with other sellers, but buyers and sellers don't compete.
Equilibrium: a price where buyers and sellers have no incentive to change their behavior; a price and quantity comparison
- "Market clearing" -- spontaneous order
- quantity demanded = quantity suppled --> good!
- "Non-Market clearing" --> not good!
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