2.3 EQUILIBRIUM

Question 1

what is equilibrium

Answer 1

• state of rest in the market unless there is an outside disturbance
• market is in equilibrium when S=D and quantity Q is bought and sold at price P

Question 2

what happens at a point above equilibrium (price of product increased)

Answer 2

• there will be excess supply/stock (called surplus) between Qs and Qd
• firms will have an incentive to reduce the price of the product
• until equilibrium is reached where S=D and quantity Q is bought and sold at price P

Question 3

what happens at a point below equilibrium

Answer 3

• excess demand (called shortage) between Qs and Qd
• causes a bidding which increases the price
• until market reaches equilibrium where S=D and quantity Q is bought and sold at price P