What lifts a pizza market up to equilibrium when the price is too low

The equilibrium in the schedule. Equilibrium is the situation in which the plans of buyers and sellers match: the quantity all sellers wish to sell equals the quantity all buyers wish to buy, and the market clears. In the pizza schedule this happens only at $6, where both quantities are 162 pizzas. The equilibrium price is therefore $6 and the equilibrium quantity 162 pizzas.

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

The further the price is below $6, the larger the shortage. At $4, customers want 270 pizzas but sellers bake only 52, so 218 orders cannot be met.

The forces that push the market back.

1. Disappointed buyers offer more. At a price below $6, some customers get no pizza, or fewer than they want. Some of them are willing to pay more than the ruling price, so the price tends to rise.
2. A higher price reduces the quantity demanded. As the price rises, other things remaining the same, some buyers cut back: this is a movement up along the demand curve.
3. A higher price raises the quantity supplied. At a higher price, sellers are willing to bake and sell more pizzas, a movement up along the supply curve.
4. The gap closes from both ends. Each rise in price narrows the shortage. Going up the schedule, the shortage falls from 218 at $4 to 102 at $5 and vanishes at $6, where the quantity sellers want to sell equals the quantity buyers want to buy. At that point no buyer needs to bid more, and the price stops rising.

This upward pressure on price whenever demand exceeds supply is what economists, following Adam Smith, call the working of the invisible hand in a competitive market. The DU SOL lesson shows the same with its own schedule: at prices where demand exceeds supply, the price rises until demand and supply are equal.

Example (our own): if a pizza outlet near a Bengaluru office park runs a very low-price offer, it is flooded with orders it cannot meet and customers wait for a long time. The outlet raises its price (or ends the offer), some customers switch to other food, and the outlet bakes more pizzas at the better price, until orders and output roughly match.

The conditions this rests on.

• The market is perfectly competitive, with many buyers and sellers and a price that responds to imbalance.
• Other things stay the same: incomes, tastes, the prices of related goods and the cost of making pizzas do not change, so neither curve shifts during the adjustment.
• The price is free to rise. If the government capped the price below $6 (a price ceiling), the price could rise only as far as the ceiling and not above it, so it would stop short of $6; an excess demand would remain at the ceiling price, and the limited supply might have to be shared out through rationing, with queues at ration shops.

Conclusion. At any price below $6 the market has an excess demand. Buyers who cannot get pizzas are willing to pay more, so the price rises; the rising price lowers the quantity demanded and raises the quantity supplied until both equal 162 pizzas at $6, the equilibrium.