If the equilibrium price of a good is greater than its market price, explain all the changes that will take place in the market.
If the equilibrium price of a good is greater than its market price, explain all the changes that will take place in the market.
In the figure, D is the market demand curve and S is the market supply curve. Market demand and market supply curves intersect at point E. Thus, point E shows the equilibrium price. This point signifies that the equilibrium price is OP and the equilibrium quantity is OQ. In the diagram, OP is the equilibrium price which is greater than the market price OP1. At the given market price, there is excess demand equal to AB. This triggers a rise in market price. In response to the rise in price, the quantity supplied tends to rise, leading to an upward movement along the supply curve, from point A to point E. Also, a rise in price leads to a backward movement along the demand curve, from point B to point E, indicating a fall in the quantity demanded. Movements along the supply and demand curves would continue to occur till the excess demand is eliminated, and equilibrium is restored. This occurs at point E, where market demand = market supply, and the equilibrium price is OP.
In the figure, D is the market demand curve and S is the market supply curve. Market demand and market supply curves intersect at point E. Thus, point E shows the equilibrium price. This point signifies that the equilibrium price is OP and the equilibrium quantity is OQ. In the diagram, OP is the equilibrium price which is greater than the market price OP1. At the given market price, there is excess demand equal to AB. This triggers a rise in market price. In response to the rise in price, the quantity supplied tends to rise, leading to an upward movement along the supply curve, from point A to point E. Also, a rise in price leads to a backward movement along the demand curve, from point B to point E, indicating a fall in the quantity demanded. Movements along the supply and demand curves would continue to occur till the excess demand is eliminated, and equilibrium is restored. This occurs at point E, where market demand = market supply, and the equilibrium price is OP.
