Thursday, May 21, 2009

Finding the Equilibrium Price

When we study the laws of supply and demand, we come up with something that is usually called the equilibrium price. This is the theoretical price at which the quantity supplied equals the quantity demanded. We also assert that the price will move to this equilibrium point in some undetermined time period.

Here's an example of adjustments taking place in the Phoenix resort marketplace.

Last summer, Chaparral Suites Resort in Scottsdale packed plenty into its $109 special: a two-room suite, cooked-to-order breakfast, happy hour on the house and weekend pool parties with a band.

This year, guests get all that plus $50 toward another meal or drinks - for the same rate.

It's recession math, tourism style...

Note that resorts (hotels) have essentially a vertical supply curve in the short run. Hence as demand shifts (decreases in this case) the quantity supplied remains the same and the price adjusts (falls in this case.)

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