Chapter 3: Problem 19

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

Expert verified

When the market price is above the equilibrium, a surplus occurs, leading sellers to lower prices to sell excess supply. This causes an increase in demand and a decrease in supply, eventually moving the price toward equilibrium. When the market price is below equilibrium, a shortage occurs, leading sellers to raise prices to take advantage of high demand. This causes a decrease in demand and an increase in supply, also eventually moving the price toward equilibrium. In both cases, market forces adjust the price until equilibrium is reached, where the quantity demanded equals the quantity supplied.

Step by step solution

Understand Equilibrium Price and Quantity

Equilibrium refers to the state of a market where the quantity demanded of a product equals the quantity supplied. The price at which this occurs is called the equilibrium price, and the quantity exchanged at this price is called the equilibrium quantity.

Price Above Equilibrium

When the market price is above the equilibrium price, the quantity supplied is greater than the quantity demanded. This results in a surplus of goods and services in the market. To sell this excess supply, sellers will lower their prices, which will lead to an increase in the quantity demanded and a decrease in the quantity supplied.

Explain the Market Adjustment Process for Price Above Equilibrium

As sellers lower their prices to clear the excess supply, buyers' demand for the product increases due to the lower prices. Simultaneously, some sellers may cut back on their production levels as they can no longer sell their goods at the higher price. This decrease in supply will eventually help eliminate the surplus of the product in the market. The market adjustment process will continue until the quantity demanded equals the quantity supplied and the market reaches a new equilibrium point.

Price Below Equilibrium

When the market price is below the equilibrium price, the quantity demanded is greater than the quantity supplied. This results in a shortage of goods and services in the market. To take advantage of the high demand and limited supply, sellers will raise their prices, which will lead to a decrease in the quantity demanded and an increase in the quantity supplied.

Explain the Market Adjustment Process for Price Below Equilibrium

As sellers raise their prices to address the shortage, buyers' demand for the product decreases due to the higher prices. Simultaneously, some sellers may increase their production levels as they are able to sell their goods at a higher price. This increase in supply will eventually help eliminate the shortage of the product in the market. The market adjustment process will continue until the quantity demanded equals the quantity supplied, and the market reaches a new equilibrium point.