Equilibrium Price Determination

How are equilibrium prices determined in a market economy?

Equilibrium prices are determined by the interaction of demand and supply. When the quantity demanded equals the quantity supplied, equilibrium is achieved.

What is equilibrium in a market?

Equilibrium occurs when the amount of goods or services that consumers want to buy equals the amount producers can supply, creating a balance in the market.

What happens in disequilibrium?

Disequilibrium occurs when supply and demand are not in balance, leading to excess demand or excess supply.

What is excess demand?

Excess demand happens when the quantity demanded exceeds the quantity supplied at the current price, leading to a shortage in the market.

What is excess supply?

Excess supply occurs when the quantity supplied exceeds the quantity demanded at the current price, leading to a surplus in the market.

How do price changes resolve excess demand?

In the case of excess demand, suppliers raise prices, which reduces demand and increases supply, restoring equilibrium.

How do price changes resolve excess supply?

In the case of excess supply, suppliers lower prices, which increases demand and reduces supply, bringing the market back to equilibrium.

Why are price adjustments important in a market economy?

Price adjustments help maintain equilibrium by signaling producers to adjust production and consumers to adjust their purchasing decisions.

How long does it take for equilibrium to be established?

Equilibrium may not occur immediately. Price adjustments and the stabilization of supply and demand can take time.

What can cause temporary disequilibrium?

Temporary disequilibrium can be caused by external factors like unforeseen events, market restrictions, or government interventions.