Question

9. If there is a shortage in a market, describe the process on how the market reaches the equilibrium price

Answer 1

A shortage arises if for a given market price, quantity demanded is higher than quantity supplied so that there is excess demand. This holds true when market price falls below equilibrium price. Driven by the lower price, firms will sell less output and therefore, consumers will start increasing their willingness to pay, which will start increasing the market price. As market price starts rising, firms increase their output sold but consumers decrease the quantity demanded, and the process continues until equilibrium is restored in the market by reaching equilibrium price at which quantity demanded equals quantity supplied.