Question

Why would a free market never operate at a quantity greater than the equilibrium quantity? Hint: What would be required for a transaction to occur at that quantity?

Short answer

A free market never operates at a quantity greater than the equilibrium quantity because transactions only occur when there's an agreement on price between buyers and sellers. If the market operates above equilibrium, a surplus arises, causing the price to decrease. This leads the market back towards equilibrium, as sellers cannot find buyers willing to pay the higher price. As the price falls, the equilibrium quantity is restored, and market stability is maintained.

Step-by-step solution

Understand Free Market and Equilibrium Quantity

A free market is an economic system where prices, production, and allocation of goods and services are determined by the voluntary exchange between buyers and sellers without government intervention. The equilibrium quantity, in the context of a free market, is the quantity at which the supply and demand of a product are equal, leading to a stable market price.

Determine the Conditions for a Transaction

A transaction in a free market occurs when a buyer and a seller agree on a price and exchange goods or services. For the transaction to take place, the buyer must be willing to pay a price that the seller is also willing to accept for their product or service. In other words, both parties should reach a consensus on the price.

Analyze Market Equilibrium

At market equilibrium, the quantity supplied equals the quantity demanded. In this situation, there is no shortage or surplus of goods, and the market price represents the price both buyers and sellers are willing to accept. No transactions will occur at a higher price, as buyers would not want to pay more, and no transactions will occur at a lower price, as sellers are not willing to accept less.

Understand Why a Free Market Never Operates Above Equilibrium Quantity

If a free market were to operate at a quantity greater than the equilibrium quantity, there would be a surplus of goods or services. In this situation, the supply would be higher than the demand, causing the price to decrease. As the price decreases, it reaches a level where buyers are willing to pay the price and the equilibrium quantity is eventually restored. In other words, in a free market, operating at a higher quantity is unsustainable as it would naturally drive the market back towards equilibrium. There would be no incentive for transactions to take place at a higher quantity because sellers can't find buyers willing to pay the required price. In conclusion, a free market would never operate at a quantity greater than the equilibrium quantity because transactions can only occur if there is an agreement on the price between buyers and sellers. A surplus in the market will automatically drive the price down, and eventually, the equilibrium will be restored.