Alex Tabarrok (reference below and video to right) explains how prices reach equilibrium and how the market works like an invisible hand coordinating economic activity.
Click for MRU video2
“At equilibrium, the price is stable and gains from trade are maximized. When the price is not at equilibrium, a shortage or a surplus occurs. The equilibrium price is the result of competition amongst buyers and sellers.”
Tabarrok notes that buyers do not compete with sellers, but with other buyers, and vice versa.
In his second lesson video on the subject (above left), Tabarrok further explores the dynamics of market equilibrium and produces the following summary graph:
and describes what this means as:
The supply of goods is bought by buyers with the highest willingness to pay
The supply of goods is sold by the sellers with the lowest costs
Between buyers and sellers, there are no unexploited gains from trade or any wasteful trades.
Click for MRU video3
Does the equilibrium model work?
In another lesson video (right) Tabarrok reviews the work of Nobel prize winner, Vernon Smith, and experimental support for the equilibrium model.
If the price in a market is above the equilibrium price, this creates ___________.
Jules wants to purchase a Royale with cheese from Vincent. Vincent is willing to offer this tasty burger for $3. The most Jules is willing to pay for the tasty burger is $8 (after all, his girlfriend is a vegetarian, so he doesn’t get many opportunities for tasty burgers). How large are the potential gains from trade if Jules and Vincent agree to make this trade? In other words, what is the sum of producer and consumer surplus if the trade happens?