Proceeding from the earlier blog where we showed that - if demand decreases with the supply remaining unchanged, then a lower equilibrium price is reached. We continue our analysis in this blog again with the use of lemons.
Again for simplicity, we would take the same market example but tweak the assumptions as follows – The Vendor from the earlier experience of not having many customers for his lemons he decides to use a different strategy - get the lemon supply multiple times a day (each delivery is of 50 lemons), but would not to take stock back home. Market Closed at 5 pm.
The lemon vendor began working through the day and had realized that customers moved in at a constant rate of around 20 people per hour. At around 2:30pm, he realized that 3pm he would have no lemons left, so he went ahead and got some more lemons and added it - expecting the demand to continue. But the delivery is always of 50 lemons, so there would be an excess of 10, he didn’t want to take these extra lemons home and hence as the time approached 4:30 pm he found 15 of them remaining. Since he didn’t want to carry it back home, he decided to reduce the price from Rs 3/- to Rs 2/- and expected that all lemons would be sold out!
Analyzing the above situation, we realize that the demand was always constant - At the rate of 20 customers walking in per hour. What really changes was the supply - given the time frame, the vendor ordered a higher supply than needed - so to complete the sale, he had to sell off all the lemons at a lower price. This could be nicely summarized in the following rule - "If demand remains unchanged, and supply increases, it leads to a lower equilibrium price"
Read in Kannada:http://somanagement.blogspot.com/2011/03/blog-post_15.html
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