Question

2) Draw a market of supply and demand inquium and labefails. Assume that the price is higher then the pain your model is there a p ply or ces demand? Explainth. What happens with this c olorum

Answer 1

Answer

The following figure shows the market for a good, where 'DD' is the demand curve for the good, and 'SS' is the supply curve of the good. The market is in equilibrium. The equilibrium point is attained at point 'E', where equilibrium price is P^*and the equilibrium quantity is Q^*.

Now, let us see what will happen if the price is greater than the equilibrium price P^*. Let, the price is P₁, which is above the price P^*. When price is P₁,from the figure we see that the supply of the good is P₁R , and the demand for the good is P₁T. We see that P₁R is greater than P₁T, i.e., the supply of the good is greater than the demand for the good. So, there emerges an excess supply in the market.

Price Quantity

Thus when market price is higher than the equilibrium price of the good, there emerges an excess supply in the market.

Now, with this disequilibrium, there will be a tendency of price fall in the market.When the price starts to fall, the quantity demanded for the good in the market will start to rise. Again with the falling price, the quantity supply in the market starts to fall. The fall in price will continue until the market gets clear again, i.e., the market comes again at equilibrium point.

Thus when market price is higher than the equilibrium price of the good, the excess supply in the market drives the price down towards the equilibrium price.

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