Question

Carefully explain (using diagrams) why is the point of intersection between supply and demand for a product point of equilibrium price and quantity and no other point. What happens if price is above or below the point of equilibrium and how is the equilibrium price and quantity restored?

Answer 1

Yes it is true that equilibrium is the only point where demand and supply intersect

it actually is the point where what the buyers are wanting from the market is exactly meet by the suppliers

let's say a market for a coffee

in equilibrium there is no deadweight loss to the society because each demand is fulfilled by its supply

The graph shown below

1if any point lies above the equilibrium point then it will create surplus in the market

surplus is created then supply is greater than the demand and due to this there is need to reach to again equiibrium by lowering the prices

2 in second case when price is below the equilibrium point then it will create shortage

in the market in case of shortage demand is greater than the supply and to reach again to the equilibrium the price has to be raised