Question

What are the rivalries described between consumers and producers in the text, and how do they result in equilibrium?

Answer 1

Naturally speaking, producers and consumers have vested interests as both seek to gain maximum benefits for themselves. Consumers increase their spending as prices reduce. This is because with a reduction of prices in the market, their incentive to consume more increases.

For example, if the price of a commodity is 5$ and my overall income is 10$ to cover for the purchase, then I can purchase up to 2 units of the commodity. If the price falls to 2$, then my purchase capacity increase to 5 units of the same good.

Thus, to increase consumption and benefit it is in the interest of the consumer that prices remain low.

On the other hand, for the producer of the good, it is of advantage to him, if the price of the goods and services offered increase over a period of time. This is because it gives him an added profit to make on each subsequent unit produced.

For example, if the price of a commodity is 10$ and my net profit from a transaction is 2$, and the price increases to 20$ and my net profit is 18$, then there is an added incentive for me to produce more goods as my profits increase with subsequent increase in production levels.

Equilibrium is resulted in a market, when both the demand for goods and services matches the supply. If the consumers consume lesser, they would get lesser satisfaction and if the producers produced lesser, they would get lesser profits. The exact opposite happens in case of increase.

This can be explained with the help of the following diagram: -

Here, we see that the demand curve is downward sloping, which indicates that higher quantity is demanded at lower price. Similarly, supply curve is upward sloping as higher quantity is supplied with higher price.

Equilibrium is achieved when P and Q intersect. Levels less than that or greater than that are situations wherein either the supply is more or the demand is more in the economy. It results in less benefit for either the consumer or the producer.

Please feel free to ask your doubts in the comments section.