Question

When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.

Answer 1

When the price rises above equilibrium price, at the higher price, quantity demanded decreases but quantity supplied increases, which leads to a market surplus. The surplus results in a downward pressure on the price, and price starts falling until it is restored to the equilibrium level where quantity demanded equals quantity supplied.

On the other hand, when the price falls below equilibrium price, at the lower price, quantity demanded increases but quantity supplied decreases, which leads to a market shortage. The shortage results in an upward pressure on the price, and price starts rising until it is restored to the equilibrium level where quantity demanded equals quantity supplied.