Question

How does prices affect the market equilibrium?

Answer 1

Any deviation from the equilibrium price will disturb the market equilibrium.

Explanation:

Equilibrium price (Q) is one which brings equality between demand and supply.

Any deviation from the equilibrium price will disturb the market equilibrium. If the prevailing price (P) is higher than the equilibrium price, there will be excess supply (AB). Buyers want to buy PA quantity. Sellers want to sell PB quantity. Hence this price is not agreeable to both the parties. Sellers reduce the price and move down along the supply curve. As the price falls buyers also buy more and move down along the demand curve. They will reach point E. At last equilibrium price Q will be established.

If the prevailing price (R) is less than the equilibrium price, there will be excess demand (FG). Buyers want to buy RG quantity. Sellers want to sell RF quantity. Hence this price is not agreeable to both the parties. Buyers pay a higher price and move up along the demand curve. As the price moves up, sellers also sell more and move up along the supply curve. They will reach point E. At last equilibrium price Q will be established.