Question

Describe equilibrium, surplus and shortage. For each situation, explain what the relationship is between Qd and Qs, and between S and D. What is causing these relationships to exist? (Answer the question in simple form and in your own words)

Answer 1

Market equilibrium occurs when supply equals demand. If the market price is higher than the equilibrium price, then there is a surplus in the market reflecting that firms are willing to supply a higher quantity of a product or service than consumers are able and willing to pay for. If the price is lower than the equilibrium price, it will create a shortage in the market reflecting that consumer are willing and able to buy higher quantity of good or service than suppliers are able and willing to produce.

According to the law of demand the price of a product and the quantity demanded are negatively related. Thus surpluses will reduce price that increase quantity demanded and decrease quantity supplied moving toward equilibrium. Shortages below equilibrium increase prices that reduce the quantity demanded and increase quantity supplied moving toward equilibrium.