Answer to Question #268343 in Microeconomics for Rimsha

Question

Suppose economy is in equilibrium at point E, Now if for some reasons there is shortage or surplus in economy, how an economy will again attain equilibrium. Explain with the help of an example

Answer 1

If a shortage exists, price of the given product will raise. As a result, the quantity demanded of the product will drop until equilibrium is attained.

For example, if you are a producer and your product is always out of stock, once you raise the price of your product, the products' quantity demanded will drop until equilibrium is reached.

If a surplus exists, price will fall in order to stimulate additional quantity demanded and decrease the quantity supplied until the surplus is done away with and the equilibrium is attained again.

For example, If you are a producer and you have alot of inventory that cannot sell, once you lower the price of your product, your product's quantity demanded will raise until equilibrium is reached.