Given a market equilibrium point, explain, using the concepts of demand and supply, how it is achieved

Question

What will be an ideal response?

Answer 1

Market equilibrium occurs at the point at which the demand curve intersects the supply curve. The quantities demanded and supplied are equal at this point, and the price at this point is the market clearing price. If the price of the item happened to be below the market clearing price, quantity demanded would exceed quantity supplied, and there would be a shortage of the item. Consumers would offer to pay a higher price to obtain the item. The higher price would induce an increase quantity supplied and a decrease in quantity demanded. Eventually, quantity supplied would equal quantity demanded at the higher, market clearing price. Conversely, if the price of the item happened to be above the market clearing price, quantity supplied would exceed quantity demanded, and there would be a surplus of the item. Producers would offer to sell the item at a lower price. The lower price would induce an increase in quantity demanded and a decrease in quantity supplied. Eventually, quantity demanded would equal quantity supplied at the lower, market clearing price.