Question about Supply and Demand graphs and Equilibrium

Economics Economics Questions
1

This was something I was thiking about in relation to Supply and Demand graph. Lets say that a given market is about to “start”, with Bob the seller about to supply a stock of 5 apples to a market, with no reservation demand (meaning the supply graph would be vertical). There is a “supreme being” that knows in order for equilibrium to exist, Bob must price his apples at $3. However, lets say that Bob’s entrepreneurship is excellent, and he prices his apples at $2, meaning that there will be a shortage because 7 apples are demanded when only 5 exist at this given time.

Now, in an auctioneering like setting, it would be easy for Bob to see that he has created a shortage because he is seeing bidders wanting to buy seven, and he can quickly acheive equilibrum by raising the price to $3 to alleviate the shortage and sell all of his stock without selling any of his goods underpriced.

However, more commonly, like other suppliers, he runs at store. So the first day of business rolls around and Johnson comes in to buy 2 apples for a price of $2. My question is, with this exchange happening that is clearly below the would be equilibrium price of $3 (without Bob knowing that he has created a shortage yet), do the supply and demand graphs that represent the apples market change, or does the supply and demand graph still reflect a market where at a price of $2, seven apples will be demanded? Does the demand graph change to reflect the fact that someone has purchased two apples already, and the supply graph shift to the left to 3, meaning that there is a new equilibrium price (lets say 3 apples demanded at a price of four) with these new market fundamentals?

2

Well, I say that yes, supply should be decreased by the purchased amount.

3

And so would demand by the purchased amount right? It might seem a little weird, but its the only way I can wrap my head around this. Supply and demand is always taught in an auction setting or describing setting prices too low or too high as “buyers rushing to stores” or “large surpluses developing” and sellers magically alleviating their problems. It just seemed natural that if so many exchanges are made at below or above equilibrium prices, then the graphs should reflect them (also meaning the graphs “in real life” move alot more).

4

They indeed should. But the graph analysis should not be taken too far, i.e. applied to real-time transaction, as it is but a static tool. It just serves theoretical purposes and use in real transactions would create problems much more pronounced that the one under discussion.

5

Thanks, these were my hunches, I just wanted to confirm because Supply and Demand is always talked about in almost an auctioneer setting in any textbook and so its hard to apply it “hardcore” to real life scenarios. I was confused because Rothbard never explictly mentioned this in MES (at least in chapter two, although I might have missed it). He did say that in real time transactions buying and selling would occur above and below the equilibrium prices, and the shortages and surpluses would reveal the equilibrium price. He never said though that the curves themselves would move based on these purchases and that there would be new equilibrium prices (due to new supply and demand curves as a result of these purchases) for the market to try to tend to.