Question

Draw a completely labeled supply and demand graph. Show the equilibrium point, the equilibrium price and...

Draw a completely labeled supply and demand graph. Show the equilibrium point, the equilibrium price and quantity show using the diagram and explain in words, why a price above the equilibrium price would fall given a free market process and the same for a price below the equilibrium price.

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Answer #1

P2 is a price which is above the equilibrium price P1. At price P2, Quantity Supplied is Greater than Quantity Demanded. There is Excess supply. There will be Competition among sellers. This would bring the price down. Therefore, equilibrium will be established at point P1.

Price P3 is a price which is below the equilibrium price P1. At price P3, Quantity Supplied is less than Quantity Demanded. There is Excess demand in the market. There will be Competition among buyers to buy the product which would drive the equilibrium price up. Hence the price would Increase until it reaches P1, which is the Equilibrium price.

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