James d. Gwartney

ELEMENT 1.6
Prices bring the choices of buyers and sellers into balance.

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supply at alternative prices. As Exhibit 2 illustrates, it slopes upward to the right, indicating
that producers will be willing to supply larger quantities at higher prices. The supply curve
provides a graphic representation of the law of supply.
Exhibit 2: Demand, Supply, and Equilibrium Price
Supply (S)
Equilibrium (E)
Demand (D)
5
7.5 10 12.5 15 17.5 20 22.5 25 27.5
Quantity (thousands of liters of ice cream)
Q*
0
2.5
5
7.5
10
P
ri
c
e
 (
G
E
L
 p
e
r 
u
n
it
)
P*
Now for a really important point: The price will tend to move toward a level, GEL 5
per liter of ice cream in our example, that will bring the quantity demanded into equality with
the quantity supplied. At the equilibrium
(?)
 price of GEL 5, Georgian consumers will want to
purchase 15 thousand liters of ice cream per day, the same quantity that ice cream producers

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31
are willing to supply. Price coordinates the choices of both consumers and producers of ice
cream and brings them into balance.
If the price is higher than GEL 5—for example, GEL 7.5—producers will want to
supply more ice cream than consumers will want to purchase. At the GEL 7.5 price, producers
will be unable to sell as many units as they would like. Inventories will rise and this excess
supply will lead some producers to cut their price to reduce their excess inventories. The price
will tend to decline until the GEL 5 equilibrium price is reached. It is easy to see, then, that if
the price is above the equilibrium, market forces will push the price down toward equilibrium.
Correspondingly, if the price of ice cream is less than GEL 5—for example, GEL 2.5—
consumers will want to purchase a larger quantity than producers are willing to supply. This
generates excess demand and will place upward pressure on price and it will tend to move back
toward the equilibrium of GEL 5. The choices of buyers and sellers will be consistent with
each other only at the equilibrium price and the market price will gravitate toward this level.