Question

Suppose that the price of a good is higher than the equilibrium price. Explain what will happen in order to establish an equilibrium price.

Answer 1

When price prevailing in the market is higher than the equilibrium price, demand will be less than supply, i.e. there is excess supply in the market. Excess supply will force the market price to slide down causing expansion of demand and contraction of supply. The process of expansion and contraction would continue until the equilibrium between supply and demand is achieved. Thus, equilibrium price will be restored through the free play of market forces.