1.

How is equilibrium reached if there is excess demand at a price lower than equilibrium price?

Answer» <html><body><p></p>Solution :At any price lower than the equilibrium price, quantity <a href="https://interviewquestions.tuteehub.com/tag/demanded-7675308" style="font-weight:bold;" target="_blank" title="Click to know more about DEMANDED">DEMANDED</a> of a commodity exceeds its quantity supplied. It is <a href="https://interviewquestions.tuteehub.com/tag/called-907796" style="font-weight:bold;" target="_blank" title="Click to know more about CALLED">CALLED</a> a situation of excess demand. <br/> It is not an equilibrium price because Quantity demanded is equal to quantity supplied at equilibrium price only. <br/> Whenever there is excess demand, eqquilibrium will be achieved as explained under. <br/> At `OP_(1)`, there is excess demand equal to `M_(1)M_(2)`. <br/> Excess demand <a href="https://interviewquestions.tuteehub.com/tag/would-3285927" style="font-weight:bold;" target="_blank" title="Click to know more about WOULD">WOULD</a> create competition among buyers which will push price up from `OP_(1)` to <a href="https://interviewquestions.tuteehub.com/tag/op-1136171" style="font-weight:bold;" target="_blank" title="Click to know more about OP">OP</a>. <br/> As price rises there would be : <br/> extension in supply from B to E <br/> <a href="https://interviewquestions.tuteehub.com/tag/contraction-932454" style="font-weight:bold;" target="_blank" title="Click to know more about CONTRACTION">CONTRACTION</a> in demand from C to E <br/> Hence, equilibrium will be achieved at point E when quantity demanded is equal to quantity supplied. <br/> <img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/MIC_ECO_XI_U04_C11_E01_025_S01.png" width="80%"/></body></html>


Discussion

No Comment Found

Related InterviewSolutions