Question

When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.

Short answer

When the market price is above the equilibrium, the quantity supplied exceeds the quantity demanded, creating a surplus. To clear this excess inventory, producers lower their prices, which increases consumer demand and decreases the quantity supplied. This process continues until the market reaches equilibrium, where supply and demand are equal. When the market price is below the equilibrium, the quantity demanded exceeds the quantity supplied, resulting in a shortage. Consumers compete for the limited goods available, pushing producers to raise their prices. As prices rise, demand decreases, and the quantity supplied increases, moving the market back toward equilibrium, where supply and demand are equal again.

Step-by-step solution

Understand the concept of equilibrium

Equilibrium price is the point where the quantity demanded by consumers equals the quantity supplied by producers. In other words, it is the price at which the market is at rest or in a state of balance, with no forces pushing it in either direction.

Identify the market forces when the price is above equilibrium

If the market price is above the equilibrium price, we can observe the following scenarios: 1. Quantity supplied is greater than quantity demanded 2. Producers are likely to have excess inventory 3. Market forces will push the price down to find the equilibrium

Explain how market forces move the price to equilibrium when the price is above equilibrium

When the market price is above the equilibrium price, the quantity supplied will exceed the quantity demanded. This surplus of goods in the market creates downward pressure on the price because producers will be looking to sell their excess inventory. To attract more customers, they may need to lower prices, and as they do so, the quantity demanded will rise, and the quantity supplied will fall. This process will continue until the price reaches its equilibrium level, where the quantity demanded and the quantity supplied equal to each other.

Identify the market forces when the price is below equilibrium

If the market price is below the equilibrium price, we can observe the following scenarios: 1. Quantity demanded is greater than the quantity supplied 2. Consumers are likely to face a shortage of goods 3. Market forces will push the price up to find the equilibrium

Explain how market forces move the price to equilibrium when the price is below equilibrium

When the market price is below the equilibrium price, the quantity demanded will exceed the quantity supplied. This shortage of goods in the market creates upward pressure on the price because consumers will be competing for the limited supply of goods available. To ration the available goods, producers may need to raise prices, and as they do so, the quantity demanded will fall, and the quantity supplied will rise. This process will continue until the price reaches its equilibrium level, where the quantity demanded and the quantity supplied equal to each other.