Question

Evaluate the effects of changes in demand and supply on the market price and equilibrium quantity

Short answer

Demand has a direct relationship while supply has an indirect one with the market price, and the opposite relationship exist for equilibrium quantity.

Step-by-step solution

Step1. Introduction

Market equilibrium is determined by the interaction of market forces of demand and supply, at their intersection point.

Step2. Explanation

Effect on Equilibrium Price:

When demand increases, and supply is assumed to be same, equilibrium price tends to go up as people are ready to pay higher prices for the limited supply available.

When supply increases, and demand is assumed to be same, equilibrium price tends to go down as people are ready to sell it out for the limited demand that exists in the market.

As the equilibrium prices go up for higher demand, the equilibrium quantity demanded shall automatically fall as the law of demand comes in play and people demand less with higher prices.

Similarly, when equilibrium prices fall for higher supply. the equilibrium quantity shall automatically go up as the law of demand comes in play and people demand more with higher prices.