Wednesday, May 14, 2008

Prices Below Equilibrium

Prices Below Equilibrium

INSERT DIAGRAM HERE.

At any market price below the equilibrium, the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve) is greater than the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price).

At prices below the equilibrium, there is a shortage of the product. The quantity demanded exceeds the quantity supplied. This situation will not be maintained very long. Since some buyers are unable to find a seller of the product at the current market price, the price of the product will tend to rise and a larger quantity of the product will be produced. (This represents a movement up the supply curve.)

As the price rises in this market, there is an increase in the quantity of this product that is supplied. (This represents a movement up the supply curve.) There also is a decrease in the quantity demanded. (This represents a movement up the demand curve.)

At any price below equilibrium, there is pressure for the market price to rise (because the quantity demanded exceeds the quantity supplied). This pressure continues until the market price reaches equilibrium.



Figure 11. An illustration of how prices below equilibrium create a shortage.

In equilibrium,
• there is no pressure for the price to change.
• the quantity supplied equals the quantity demanded.

If a market is not in equilibrium, market forces are pushing it toward equilibrium.

1 comment:

  1. Thanks for this... Very helpful for my economics study..

    ReplyDelete