Answer to Question #45538 in Microeconomics for Jasmine Jackson

Question

Explain the series of events that would occur in order for the new equilibrium price to be realized.

Answer 1

Supply and demand come together in the marketplace. With a downward-sloping demand curve and an upward-sloping supply curve, there will ordinarily be a point of intersection of the two curves. That point shows the price at which the quantity demanded in the market equals the quantity supplied. This is called an equilibrium point, and the corresponding price is the equilibrium price while the corresponding quantity is the equilibrium quantity. At equilibrium, there is no tendency for price or quantity to change.
Consider now prices below the equilibrium price. The quantity demanded will be greater than the quantity supplied. This is referred to as excess demand, or a shortage. In the face of a shortage, consumers will compete with one another for the limited supply, and this will result in an increase in the price of the product. The increase in price will stimulate a reduction in quantity demanded and an increase in quantity supplied (movements up along the demand curve and the supply curve) until the equilibrium point is reached. Conversely, at prices above the equilibrium price, quantity demanded will be smaller than the quantity supplied, and there will be excess supply (a surplus) in the market. With a surplus, firms will compete to sell their products, and this will result in downward pressure on the price of the product. As with a shortage, there will be movements along the supply and demand curves as price changes, until the equilibrium point is reached.