<blockquote>
<p>Since money_made = quantity_sold * price, as prices increase, isn't it possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one?</p>
</blockquote>
<p>No,</p>
<ol>
<li>Even in monopoly case increasing price does not necessarily always makes sense because demand elasticity typically increases with price. So even in monopoly case there will be some optimal price <span class="math-container">$p^*$</span>, which maximizes profit, that will likely be well below some exorbitant price at which demand is still non-zero.</li>
<li>If a business does not have monopoly, they have to contend with the fact that if they do not serve some customer other firm will. Hence firms are not just restricted by overall market demand but also their firms specific demand which depends on prices of other firms. For example, in perfect competition even though overall demand might not be perfectly elastic firm demand will be and so any deviation from market price would result in zero sales. In less than perfect competition results are not so radical but firms still cannot charge any prices willy-nilly.</li>
</ol>

CC BY-SA 4.0
2024-11-28T17:33:35.403Z
Regarding case one, it seems reasonable to me that if demand elasticity increases with price, there will be an optimal price that maximizes profit (I guess the reason is as the price rises, a given increase in price will cause a larger loss of customers). However, isn't this price not necessarily equal to the equilibrium price (at least I don't see a reason it should be)? If that is the case, what is the significance of the equilibrium price?
Petar Dimitrov
CC BY-SA 4.0
2024-11-28T21:08:18.607Z
@PetarDimitrov for monopoly it would be equilibrium price. Also by the way in competition firms try to maximize their profit however they need to take into account what other firms are doing and not just worry about demand so there the equilibrium price of every firm will be lower than price that would maximize profit in contrafactual without competition, but these competitive firms still maximize profit but they face more constraints
1muflon1
CC BY-SA 4.0
2024-11-28T17:04:39.490Z
2024-11-28T17:04:39.490Z
1muflon1
<p>What is &quot;fixed, for all points on the supply curve&quot; of an individual firm is the production technology and the prices of inputs into the production process. These ingredients determine the cost function of the firm, and therefore its supply function in a competitive market.</p>
<p>It is true that in principle it is &quot;possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one&quot;. (This could happen when demand is very inelastic.)</p>
<p>However, in a competitive market, a market price above the equilibrium price simply cannot be sustained. The reason is that at such a price demand will be lower than what firms could and would like to supply. Therefore a single firm could <em>further</em> increase its profit by lowering its own price slightly below the market price and then selling its optimal (higher) quantity. However, this incentive to lower its own price below the market price to increase profits applies to <em>all</em> firms at <em>any</em> market price above the equilibrium price. Thus, there would be a mutual underbidding process which stops only when the market price equals the equilibrium price.</p>

CC BY-SA 4.0
2024-11-28T17:25:01.507Z
Given the second sentence of your first paragraph, I think you are referring to an individual firm's supply curve in the first sentence.  It might be worth stating this explicitly as we do allow input prices to vary when considering the long-run market supply curve.
smcc
CC BY-SA 4.0
2024-11-29T13:44:21.867Z
@smcc, Right. Thx, done!
VARulle
CC BY-SA 4.0
2024-11-28T17:02:38.493Z
2024-11-29T13:43:40.020Z
2024-11-29T13:43:40.020Z
VARulle
<p>I am reading an intro economics textbooks and I am on the chapter discussing supply and demand. The author says that when the price of the product is higher than the equilibrium price (the intersection of the supply and demand curves) there will a surplus and the seller will be pressured to sell their product at a lower price - why is this the case? Since money_made = quantity_sold * price, as prices increase, isn't it possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one? Intuitively, this makes sense to me, as for example supermarkets sell more vegetables and fruits that are bought (some rotting before being sold), but supermarkets still refuse to lower their prices so that all of their vegetables and fruits are sold.</p>
<p>This might be related to me possibly misunderstanding what exactly the supply curve means  - my understanding is that for all points on the demand curve we assume that consumers have a fixed budged, but what do we assume for all points on the supply curve - that the budget, profit or something else for the sellers is fixed?</p>

<supply-and-demand><profits>
Is the equilibrium price really the best price for the supplier?
Petar Dimitrov
# Is the equilibrium price really the best price for the supplier?

(Asked by: username_0 on 2024-11-28)

I am reading an intro economics textbooks and I am on the chapter discussing supply and demand. The author says that when the price of the product is higher than the equilibrium price (the intersection of the supply and demand curves) there will a surplus and the seller will be pressured to sell their product at a lower price - why is this the case? Since money\_made = quantity\_sold \* price, as prices increase, isn't it possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one? Intuitively, this makes sense to me, as for example supermarkets sell more vegetables and fruits that are bought (some rotting before being sold), but supermarkets still refuse to lower their prices so that all of their vegetables and fruits are sold.

This might be related to me possibly misunderstanding what exactly the supply curve means - my understanding is that for all points on the demand curve we assume that consumers have a fixed budged, but what do we assume for all points on the supply curve - that the budget, profit or something else for the sellers is fixed?

**Tags:** supply-and-demand, profits


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## 2 answers

### Answer by username_1 on 2024-11-28. Score: 0

> Since money\_made = quantity\_sold \* price, as prices increase, isn't it possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one?

No,

1. Even in monopoly case increasing price does not necessarily always makes sense because demand elasticity typically increases with price. So even in monopoly case there will be some optimal price $p^\*$, which maximizes profit, that will likely be well below some exorbitant price at which demand is still non-zero.
2. If a business does not have monopoly, they have to contend with the fact that if they do not serve some customer other firm will. Hence firms are not just restricted by overall market demand but also their firms specific demand which depends on prices of other firms. For example, in perfect competition even though overall demand might not be perfectly elastic firm demand will be and so any deviation from market price would result in zero sales. In less than perfect competition results are not so radical but firms still cannot charge any prices willy-nilly.

> **Comments:**
> **username_0**: Regarding case one, it seems reasonable to me that if demand elasticity increases with price, there will be an optimal price that maximizes profit (I guess the reason is as the price rises, a given increase in price will cause a larger loss of customers). However, isn't this price not necessarily equal to the equilibrium price (at least I don't see a reason it should be)? If that is the case, what is the significance of the equilibrium price?  
> **username_1**: @username_0 for monopoly it would be equilibrium price. Also by the way in competition firms try to maximize their profit however they need to take into account what other firms are doing and not just worry about demand so there the equilibrium price of every firm will be lower than price that would maximize profit in contrafactual without competition, but these competitive firms still maximize profit but they face more constraints  

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### Answer by username_2 on 2024-11-28. Score: 0

What is "fixed, for all points on the supply curve" of an individual firm is the production technology and the prices of inputs into the production process. These ingredients determine the cost function of the firm, and therefore its supply function in a competitive market.

It is true that in principle it is "possible that the increase in price can compensate the fact that less of the product is sold, so that the seller can make increasingly larger profits even with prices above the equilibrium one". (This could happen when demand is very inelastic.)

However, in a competitive market, a market price above the equilibrium price simply cannot be sustained. The reason is that at such a price demand will be lower than what firms could and would like to supply. Therefore a single firm could *further* increase its profit by lowering its own price slightly below the market price and then selling its optimal (higher) quantity. However, this incentive to lower its own price below the market price to increase profits applies to *all* firms at *any* market price above the equilibrium price. Thus, there would be a mutual underbidding process which stops only when the market price equals the equilibrium price.

> **Comments:**
> **username_3**: Given the second sentence of your first paragraph, I think you are referring to an individual firm's supply curve in the first sentence.  It might be worth stating this explicitly as we do allow input prices to vary when considering the long-run market supply curve.  
> **username_2**: @username_3, Right. Thx, done!  

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