Consider a market free of government intervention and having a downward sloping demand curve and an...
Consider a market free of government intervention and having a downward sloping demand curve and an upward sloping supply curve intersecting at some price P0.
- Write a short explanation of why any price higher than P0cannot be a free market equilibrium.
- Write a shortexplanation of why any price lower than P0cannot be a free market equilibrium.
- Now decrease supply a great deal and decrease demand until the curves no longer intersect (that is, the curves meet the vertical axis without intersection). What is the free market equilibrium quantity?
Homework Answers
Answer-
Equilibrium price in a market of a particular product is determined through interaction between demand and supply curve in the market of that product. Equilibrium to be unique and stable it has to be in the 1st quadrant of the diagram i.e. intersection between supply and demand curve has to be in the 1st quadrant of the diagram.
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