what is market equilibrium ? define excess demand and excess supply. what happens if excess demand occurs in the market? suppose the demand for a product 50 and supply is 55.will price increase
Answers
Answer:
Explanation:
market equillibrium:
A commodity can only be sold when both consumers and producers consent with a price. At this price, the market forces of demand and supply work in harmony and the market is said to be in equilibrium.
EXCESS DEMAND:
When at the current price level, the quantity demanded is more than quantity supplied, a situation of excess demand is said to arise in the market. Excess demand occurs at a price less than the equilibrium price. Since the prices would decrease, it would act as a bait for buyers to flock in markets which would lead to competition among these buyers.
This competition would lead to an increase in prices. As the prices increase the law of demand will operate to decrease the demand and the buyers will start vanishing. Conversely, this increase in prices would lure the suppliers to increase supply with hopes to earn greater profits.
Such a decrease in demand and increase in supply resulted by an effective increase in prices continues until the equilibrium level is attained. Thus automatically the conditions of excess demand are wiped out of the market.
EXCESS SUPPLY:
Excess supply is a market condition when the quantity supplied is greater than the demand for a commodity at the prevailing market price. It occurs at a price greater than the equilibrium price level. As the price will be greater than the equilibrium price the sellers would sense this as an opportunity to earn greater profits and would pump in the supply.
This would lead to an effective increase in stocks and a tough competition among the sellers to sell their respective supplies. Consequently, to sell more supply, suppliers would start decreasing the prices to sell the excess stock. This decrease in price man-oeuvres the market supply and market demand which fall (law of supply) and rise (law of demand) respectively.
This self-adjusting mechanism pulls the price back to the equilibrium level. Effectively excess supply is wiped out of the market.
what happens if excess demand occurs in the market?
The increase in demand causes excess demand to develop at the initial price. a. Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output