Answer to Question #208672 in Microeconomics for Angry Bird

Question

The market mechanism is the tendency for prices to change until the quantity demanded equals quantity supplied. Using illustrations provide an explanation on how the market adjusts to the market equilibrium when the price in the market is not originally set at the market equilibrium price.

Answer 1

Solution

The above graph shows when the the price is above equilibrium

• If the price is set at P2, this is above the equilibrium P1. At the price P2, then supply (Q2) would be greater than demand (Q1) and therefore there is too much supply. There is excess supply at (Q2-Q1)
• Hence the markets will reduce the price and supply less of the product. This will then encourage more demand and therefore the surplus will be eliminated. The new market equilibrium will be at Q3 and P1.

The above graph shows when the prices in the market are below equilibrium

Here the demand is greater than supply shown by (Q1-Q2)

Hence the market will supply more and increase the price to P1 as movement occurs in the supply curve causing an equilibrium at P1 and Q3.