Chapter 7.4, Problem 4R

To determine

To discuss: The determination of equilibrium.

Explanation of Solution

The price which makes supply equal to demand is termed the price of equilibrium. Graphically, the equilibrium price may be said to be the point where demand curve intersects with supply curve. This is the price at which no unsold stock is left, so there is no unfulfilled demand either. But it is also known as the price for market clearing.

  

When the price and quantity of the Equilibrium is achieved, Stable Equilibrium is attained. Stable equilibrium fixes any demand and supply disruption, and restores the initial equilibrium. When the price falls below the equilibrium level, other factors stay the same, the demand rises and the supply decreases. A shortage of goods occurs which in effect raises the price to the equilibrium level.

Likewise, the demand declines as the price is raised above the equilibrium level and the supply increases. A surplus of goods occurs which, in effect, lowers the price to the equilibrium price. Therefore, the market is alone in restoring the equilibrium level. Prices are not, though, dictated purely by the demand and supply forces. Certain variables, such as the price of substitute goods, the price of related goods, government policies, market competition, etc. also play a chief role in deciding the prices.

Economics Concept Introduction

Introduction: Equilibrium is the condition of equilibrium among market supply and demand, and as a consequence prices are constant. Over-supply of goods or services usually contributes to declining costs, which leads to higher demand. The offers and demand balancing affect develops in a state of equilibrium.