Question

1. Describe the equilibrium of a market (develop an example). Describe the forces that will move a market towards equilibrium. (8 points)

Answer 1

Equllibrium of market is the situation where the price level at which quantity demanded will be equal to quantity supplied. At that price the consumer will buy the good in the market and producer will supply the good in the market. It is the situation where both are willing to exchange at that price.

Surplus and shortage are the two forces that will push market towards equillibrium.

When the price level of a product is high the supplier will supply more quantity of goods and consumer will demand less due to high price level. This will to surplus situation where producer cannot be able to sell that product at that high price. So producer will reduce the price of good and make the consumer to demand more which will lead the market to equllibrium condition.

When the price is low the demand for the product will be high by the consumers, but the producer will not be able to supply more than at that price which leads to shortage of goods in the market. So the price of the good is increased by the producer which leads to fall in demand thus again leading the market to equllibrium condition.