Question

Explain how a free working market will bring the economy to equilibrium. Why is equilibrium important? When constructing supply and demand curves we assume that all factors affecting supply and demand remain constant except price. Explain what happens to equilibrium when price changes. Explain what happens to equilibrium when any of the factors, other than price, change.  

Answer 1

The free market is in equilibrium when demand for goods and services and supply of goods and services are equal. There will be a single price which always will bring these two into balance.This will ultimately bring the economy into equilibrium.

Equilibrium is important because it stabilizes the prices. The solution to the problem of level of income, employment etc also lies in the equilibrium.

When price changes equilibrium changes in a way that there occurs a movement along the curves and when factors other than price changes the curves get shifted.