The equilibrium price in problem is P = 3. This is an equilibrium because at this price, quantity demanded is precisely equal to quantity supplied (Q = 500). One might ask how the market is to reach this equilibrium point. Here we look at two ways:
a. Suppose an auctioneer calls out prices (in dollars per gallon) in whole numbers ranging from $1 to $5 and records how much orange juice is demanded and supplied at each such price. He or she then calculates the difference between quantity demanded and quantity supplied. You should make this calculation and then describe how the auctioneer will know what the equilibrium price is.
b. Now suppose the auctioneer calls out the various quantities described in problem. For each quantity, he or she asks, ‘‘what will you demanders pay per gallon for this quantity of orange juice?’’ and ‘‘How much do you suppliers require per gallon if you are to produce this much orange juice?’’ and records these dollar amounts. Use the information from problem to calculate the answers that the auctioneer will get to these questions. How will he or she know when an equilibrium is reached?
c. Can you think of markets that operate as described in part a of this problem? Are there markets that operate as described in part b? Why do you think these differences occur?