Question

Draw a graph of market equilibrium. Explain what the equilibrium point means . On the same graph, draw a condition of surplus (1 mark). Discuss what surplus means by answering the following sub-questions. a) Describe the behavior of buyers and sellers in times of surplus (1.5 marks). b) From your surplus price describe what will happen to the market price (1.5 marks).

Answer 1

At the point of equilibrium the quantity demanded equals the quantity supplied. The price at this point is known as equilibrium price and quantity is known as equilibrium quantity.

The surplus would mean that the quantity demanded is less than the quantity supplied in the market or the quantity supplied by the seller is more than the quantity demanded. In this situation there will remain a stock unsold in the market.

In times of surplus the buyers will NOT buy unless the sellers reduce the price. The buyers will reduce the price to clear the unsold stock in the market.

This mechanism will continue till the point the quantity demanded is equal to the quantity supplied and there is neither shortage nor surplus in the market. When there is surplus the market price will fall to clear the unsold stock.