Question

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7. Disequilibrium Suppose the market for cars is unregulated. That is, car prices are free to adjust based on the forces of supply and demand If a shortage exists in the car market, then the current price must be price. For the market to reach equilibrium, you would expect than the equilibrium

Answer 1

Answer 7

Shortage exists in a market when quantity demand is greater than quantity supplied. Note : demand curve is downward sloping and Supply Curve is upward sloping. Hence Quantity demand is greater than quantity supplied when Price is less that Equilibrium Price. (Note: Equilibrium Price is the price at which market is in equilibrium i.e. Quantity Supplied = Quantity Demand). Hence, If shortage in the car market exists, then current market must be lower than equilibrium Price.

As there is shortage i.e. there is excess demand, hence excess demand put pressure on supply that will result in increase in price and as price increases, according to a law of demand, Quantity demanded decreases and according to a law of supply, Quantity supplied increases. This will continue till quantity quantity demand = quantity supplied.

Hence, For the market to reach equilibrium we would expect Price of Cars to increase.

Hence Price of Cars will increase.