What brings a pizza market down to equilibrium when the price is too high

The equilibrium in the schedule. A market is in equilibrium when the amount buyers plan to purchase equals the amount sellers plan to offer, so that the market clears; the price at which this happens is the equilibrium price. In the pizza schedule the two quantities are equal only at $6, where 162 pizzas are demanded and 162 are supplied. So the equilibrium price is $6 and the equilibrium quantity is 162 pizzas.

What happens at a price above equilibrium. When market supply is larger than market demand at the ruling price, the market has an excess supply (a surplus). From the schedule:

The higher the price above $6, the bigger the surplus. At $8, for example, pizzerias are ready to bake 220 pizzas but customers want only 106, so 114 pizzas go unsold.

The forces that push the market back.

1. Sellers cannot sell all they want. At a price above $6 some pizza sellers cannot sell the quantity they want to sell, so they lower their price to attract buyers.
2. A lower price raises the quantity demanded. As the price falls, other things remaining the same, buyers want more pizzas: this is a movement down along the demand curve.
3. A lower price reduces the quantity supplied. At a lower price, sellers find it worth producing fewer pizzas, so they move down along the supply curve.
4. The gap closes step by step. Each cut in price narrows the surplus from both ends. Going down the schedule, the surplus shrinks from 164 at $9 to 114 at $8 and 60 at $7, and disappears at $6, where sellers can sell exactly what they wish to sell. Then no seller has a reason to cut the price further.

Economists call this self-correcting pressure on price the invisible hand, an idea going back to Adam Smith: in a competitive market, excess supply pushes the price down and excess demand pushes it up. The DU SOL lesson makes the same point with its own price schedule: at prices where supply exceeds demand, the price falls until demand equals supply.

Example (our own): if pizza outlets in a college area of Delhi price a pizza well above what clears the market, by closing time they are left with unsold stock. They respond with lower prices and offers, which bring in more buyers, while some outlets bake fewer pizzas the next day, until the stock they bake roughly matches what they can sell.

The conditions this rests on.

• The market is perfectly competitive, with many buyers and sellers who are free to change the price they offer.
• Other things stay the same: incomes, tastes, the prices of related goods and the cost of making pizzas do not change, so the demand and supply curves do not shift while the price adjusts.
• The price is free to move. If the government fixed a minimum price above $6 (a price floor), the price could fall only as far as the floor and not below it, so it would stop short of $6 and an excess supply would remain at the floor price.

Conclusion. At any price above $6 the market has an excess supply. Competition among sellers to get rid of unsold pizzas drives the price down; the falling price raises the quantity demanded and lowers the quantity supplied until both equal 162 pizzas at $6, the equilibrium.