Answer to Question #130646 in Microeconomics for Ongeziwe Adkins

Question

Suppose the equilibrium price for a tin baked bean is R5 but that the price is set at R6. Will the price of R6 per tin be maintained?

Answer 1

The price of R6 cannot be maintained. At the equilibrium price level of R5, quantity demanded equals quantity supplied, and neither shortages nor excess supplies exist in the market for tinned baked beans. The price of R6 is above the equilibrium price level, and the market will enter into a state of disequilibrium.

Following the principles of demand and supply, when price is pegged at R6, quantity demanded falls in respect to the law of demand. At the same price, quantity supplied increases in accordance to the law of supply. As a result, quantity of tinned baked beans supplied will exceed quantity demanded. Consequently, excess stocks will exist in the market.

Due to excess stocks, profitability falls as sales declines. The consequences of this stock piling result is firms discounting their stocks with the intention to clear them and avoid stock piling costs such as product expiry and storage costs. Eventually, the price falls until the R5 equilibrium price is reached; where the market clears.

Because tinned baked beans has many close substitutes such as tinned fish, meat,and many more, it implies that it is elastic in demand. Therefore, the impact of a change in price has a significant impact on quantity demanded.

Thus, in conclusion, the price of R6 cannot be maintained as it results in excess stocks as the market enters a disequilibrium state. The resultant excess stocks will result in the price faking back to the equilibrium price where the market clears.