In the earlier blog on supply and demand, I made a mention of Equilibrium Price that is set between me and the lemon vendor. Let me now look at how the equilibrium price would vary if the sole vendor had more customers than me at that moment. The question here is would I have got the lemons at the same price as we agreed up on? Let’s examine.
Here are some assumptions we make: There is only one lemon vendor in the market, and he has just 3 lemons remaining - I get it there first and he says Rs 4/- per lemons. I begin bargaining to see if I can get them at Rs 3/- per lemon, just then another person walks in as asks for lemons. The lemon vendor now realized that both want the lemons decided to increase the price by a rupee and says it is Rs 5/- per lemon. The new person asks for Rs 4.50/- and the vendor without a second thought and not bothering to even look at me packs the 3 lemons at Rs 4.5/- each and closes his shop. I have no lemons just my Rs 10/- which was more valuable for me than at least 2 lemons!
When we look at this case - we realize that the minute the vendor realized there was competition; and the lemons were a must for both of us (me and the other customer) he decided to increase the price of each and enhance his profit. This is pretty common right!
This is highlighted by a rule that states - "If demand increases and supply remains unchanged, then it leads to higher equilibrium price and quantity". The price increase from Rs 4/- to Rs 4.5/- and the number of lemons being sold increase from possibly 2 to 3!
Read in Kannada: http://somanagement.blogspot.com/2011/02/blog-post_28.html