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Market for a good is in equilibrium. Explain the chain of reactionsin the market if the price is (i) higher than equilibrium price and (ii)lower than equilibrium price. |
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Answer» SOLUTION :(i) When price is HIGHER than equilibrium price: `cdot` There is excess supply and producers are not in aposition to SELL all they want to sell at the given price. `cdot` This leads to competition between producers. `cdot` Competition between producers leads to lowering of price. `cdot` Lowering of price raises demand while reduces supply. Thiscontinues TILL demand is equal to supply again at the original equilibrium. (ii) When price is lower than the equilibrium price: `cdot` There is excess demand and consumers AR not in a position to buy all they want to buy at the given price. This leads to competition between consumers. `cdot` Competition leads to rise in price. `cdot` Rise in price reduces demand while raises supply. This continues till demand is equal to supply again at the original equilibrium. |
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