The equilibrium price is determined by forces both demand and supply of a product. At the equilibrium point the quantity of tea supplied in the market is equal to quantity demanded. This means that customers will be able to get the quantity they need from the market while suppliers will sell all the quantity they supply in the market. The equilibrium price will therefore be shown by the intersection of supply and demand curve. At the equilibrium point the market clears ensuring satisfaction of customers and suppliers.
However, price of a packet of 500 grams of tea keeps on changing making sellers to pay different price. This means that the equilibrium price keeps on changing because the equilibrium price is a reflection of market price. It therefore means that either the supply or demand of tea has changed compelling the equilibrium price to change (More, D., Subash , A. & Hemachandra, N,2008).
The most common factor affecting quantity of tea supplied is price; economists have indicated that increase in price leads to increase in quantity of tea supplied in the market when all factors remain constant. It therefore means that suppliers will increase the quantity supplied as market price of tea increases. This means that price causes movement along the supply curve unlike other factors like cost of producing tea, climatic conditions, government policies like subsidies and quotas among others. This other factors will cause shift in supply curve either inwards or out wards. For example, when there is favorable climate production of tea increases and this cause shift of supply curve outwards from S to Sr while unfavorable climatic conditions will cause inwards shift of supply curve from S to S1 (Gijo, 2011). This is indicated in the below sample market.
On the other hand demand of tea is also affected by the price. Researchers have shown that when price increases quantity of tea demanded decreases but when the prices decrease quantity demanded increases if all other factors are held constant. The price will therefore cause movement along demand curve while all this other factors will lead to shift of demand curve. The other factors which affect demand are size of the population; cultural and religious believes on tea taking, taste and preferences, expectations of future price changes among others. (Gijo, 2011). The shift is illustrated in the below graph.
All factors affecting demand and supply will always determine the equilibrium price and of a commodity. For example, when a new brand of tea is brought into the market, the company will fix the commodity at a certain price; the price reflects all costs of production and other factors affecting supply. The buyers will come to the market to have this new brand at the given price. The amount of tea purchased will depend whether the sellers overpriced or underpriced the new brand. In case where the brand is overpriced the entire commodity supplied will not be purchased i.e there will be excess supply. This will force them to lower the price till such a price where their stock quantity supplied will be equal to that demanded. This will Creates a equilibrium point i.e. p*,Q*.
On other hand, if the management underpriced the product buyers will purchase all the available stock and their demand will still remain unsatisfied. This indicates a situation of excess demand in tea market. This will make sellers increase their prices without worrying so as to earn high profit. The price can be increased up to the point where quantity supplied will equal to that demanded i.e (P*,Q*) . this creates equilibrium in the market.
Shift of either supply curve or demand curve creates a new equilibrium point, because such shift of either of the curves is affected by factors affecting either demand or supply. The diagram below shows how new equilibrium is created due to shift of the two curves. It can therefore be said that the equilibrium price reflects all this factors affecting both supply and demand.
Gijo. E (2011). Demand forecasting of tea by seasonal ARIMA model. International journal of business excellence. Vol 4(1).pp 111-124
More, D., Subash , A. & Hemachandra, N. (2008) ‘Business excellence through supply
Chain flexibility in Indian industries: an investigative study’, Int. J. Business Excellence,
Vol. 1, Nos. 1/2, pp.9–31
