Question

How is the equilibrium price​ determined? What happens if the price is above the equlibrium​ price? What happens if the price is below the equilibrium​ price?

Answer 1

The demand curve determines the negative relationship between the price of a product and quantity demanded and the supply curve illustrates the relationship between the price level and quantity supplied. Now, when the demand and supply curve intersects with each other, the price that consumers are willing to pay for a product becomes equal to the price that sellers are willing to receive for the product and the market clears and the equilibrium price level is determined.

Now, if the price is kept at a level, which is higher than the equilibrium price, then the quantity demanded of the product at that price becomes smaller than the quantity supplied of the product and there arises excess supply or surplus of the product which provides downward pressure on the price level. Hence price started to fall and keep on falling until the equilibrium price is reached and the market clears.

Now, if the price is kept at a level, which is lower than the equilibrium price, then the quantity demanded of the product at that price becomes greater than the quantity supplied of the product and there arises excess demand or shortage of the product which provides upward pressure on the price level. Hence price started to rise and keep on rising until the equilibrium price is reached and the market clears.