Answer to Question #228919 in Microeconomics for Cebo

Question

Assume the equilibrium price in a free market for an office table is R320,00. If the price of the table moves up to R400,00, explain how the market for this piece of furniture moves from disequilibrium to equilibrium.

Answer 1

The free market refers to the market in which the economy lies at the equilibrium level. It means the demand and supply are equal to each other. 

The equilibrium price in a free market for an office table is R320,00. If the price of the table moves up to R400,00 then there is excess supply in the market. It means the supply exceeds demand such that the price lies above the market price. To reach back at equilibrium, the price falls in such a way that the quantity supplied decreases and the quantity demanded increases. It can be seen in the diagram as:-

The above diagram shows that as price rises from 32000 to 40000 then quantity supplied (Qs) exceeds than quantity demanded (Qd). It creates the excess supply in an economy.