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Determine whether the following statement is TRUE, FALSE or UNCERTAIN. Explain your answer carefully using a...

Determine whether the following statement is TRUE, FALSE or UNCERTAIN. Explain your answer carefully using a supply and demand diagram. The score for this exercise will be based on the quality of your explanation.

“If a price is not an equilibrium price, there is a tendency for price to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good traded.”

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Answer #1

True.

When price is above equilibrium level then demand is less than supply. There is surplus of goods in the market so their is pressure on price decreases which increases quantity demanded by consumers. More goods will be traded after it.

When price is below equilibrium level then demand exceeds supply and causes shortage of goods in the market. There is pressure on price increases which increases quantity supplied and decrease quantity demanded.

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