The equilibrium price is determined by forces of demand and supply of a commodity. At the equilibrium point the quantity of coffee supplied in the market is equal to quantity demanded. This means that suppliers will sell all the quantity they supply and customers will be able to get the quantity they need from the market. The equilibrium price will therefore be shown by the intersection of supply and demand curve.
However, when I go to purchase a tin of 500 grams of coffee I do not always pay the same price. This means that the equilibrium price keeps on changing because the equilibrium price is the market price. It therefore means that either the supply or demand of coffee changes making the equilibrium price to change.
I have been trying to research on what affects the quantity of coffee supplied in the market. The most common factor is price; economists have indicated that increase in price leads to increase in quantity of coffee supplied in the market when all factors remain constant. It therefore means that suppliers will increase their supplier as market price of coffee increases. Hence price causes movement along the supply curve unlike other factors like climatic conditions, cost of producing coffee, government policies like taxation and quotas among other. This other factors will cause shift in supply curve either out wards or inwards. For example, when there is favorable climate production of coffee will increases and this will 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 (Jain, & Khanna, 2006).
On the other hand demand of coffee is also affected by the price; when price increases quantity of coffee demanded decreases but when the prices decrease quantity demanded increases when other factors affecting demand remain constant. Examples of other factors are size of the population, taste and preferences, expectations of future price changes among others. The price will therefore cause movement along demand curve while all this other factors will lead to shift of demand curve (Jain, & Khanna, 2006).
All factors affecting demand and supply will always determine the equilibrium price and quantity of coffee bought. For example when a new brand of coffee is brought into the market, the sellers will fix the commodity at a certain price, while buyers will come to the market to have this new brand of coffee at the given price. There is likelihood that the sellers either overpriced or underpriced this brand. If the sellers overprice the commodity then they will not be able to sell all their stock i.e there will be excess demand. This will force them to lower the price till such price where their stock supplied will be equal to that demanded. Creating a equilibrium point i.e. p*,Q*.
On other hand, if they underpriced the commodity then the buyers will purchase all the available stock and their demand will still remain unsatisfied. This will make sellers increase their prices without worrying of lack of market up to the point where quantity supplied will equal to that demanded i.e (P*,Q*).
Shift of either supply curve or demand curve will create a new equilibrium point, because shift of either of the curves is affected by factors affecting either demand or supply and I have earlier indicated that the equilibrium price will reflect all this factors.
References
Jain, T., & Khanna, O. (2006). Business Economics (for BIM). Ambala city: V.K publishers.
