Quantity adjustment

Quantity adjustment

In economics, the concept of quantity adjustment refers to one possible result of supply and demand disequilibrium in a market, either due to or in the absence of external constraints on the market. In the textbook story, if the quantity demanded does not equal the quantity supplied in a market, price adjustment is the rule: if there is a market "surplus" or glut (excess supply), prices fall, ending the glut, while a "shortage" (excess demand) causes price rises. However, instead of price adjustment -- or, more likely, "simultaneously" with price adjustment -- quantities may adjust: a market surplus leads to a cut-back in the quantity supplied, while a shortage causes a cut-back in the quantity demanded. The "short side" of the market dominates, with limited quantity demanded constraining supply in the first case and limited quantity supplied constraining demand in the second.

Economist Alfred Marshall saw market adjustment in quantity-adjustment terms in the short run. During a given "market day," the amount on the market was "given" -- but it adjusts in the short run, a longer period: if the "supply price" (the price suppliers were willing to accept) was below the "demand price" (what purchasers were willing to pay), the quantity in the market would rise. If the supply price exceeded the demand price, on the other hand, the quantity on the market would fall.

Quantity adjustment contrasts with the tradition of Leon Walras and general equilibrium. For Walras, (ideal) markets operated "as if" there were an Auctioneer who called out prices and asked for quantities supplied and demanded. Prices were then varied (in a process called "tatonnement" or groping) until the market "cleared," with each quantity demanded equal to the corresponding quantity supplied. No actual trading was allowed until the market-clearing price was determined. In Walras' system, only price adjustment operated equate the quantity supplied with the quantity demanded.

A simple model for price adjustment is the "Evans price adjustment model", which proposes the differential equation

: frac{dp}{dt} = k (D-S),

which says that the rate of change of price is proportional to the difference in supply and demand. This equation predicts that if demand exceeds supply, price will increase, and vice versa, and also captures the market equilibrium occurring when supply and demand are balanced.

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