Question

Question: By explaining law of demand and law of supply show how prices of goods and services are determined in all types of market? What are those forces that move a market towards equilibrium? Why it is not advisable for any government of rely on price floor and price ceiling? chapters 4 and 6

Answer 1

In all types of market prices are determined at the equilibrium. Equilibrium is at that point where the demand equals the supply. At this point an equilibrium quantity and price is determined.

The law of demand states that other things remaining unchanged, as the price of a commodity increases the quantity demanded decreases and vice versa.

On the other hand, the law of supply states, other things remaining unchanged, as the price of a commodity increases it's supply also increases and vice versa.

Thus the demand curve slopes downwards indicating a negative relationship between price and quantity demanded and the supply curve slopes upwards indicating a positive relationship between price and quantity supplied.

The point where these two curves intersect determine the price of a commodity.

Equilibrium is that point where the buyers are willing to purchase the same amount of a commodity that the sellers are willing to sell.

If the demand exceeds the supply then there will be excess demand in the market for the good. So in order to fulfil the demand the suppliers will increase the supply in the market and eventually the market will be back at equilibrium.

On the other hand, if the supply exceeds demand there will be excess supply in the market. So the suppliers will cut down the production and gradually it will come back to the equilibrium where both demand and supply will be equal.

The government should not rely on price ceiling and floor price because it leads to fixing the price below or above the equilibrium price. Thus leading to an excess demand or supply and instability in the market. Thus for the market to stay in equilibrium the forces of demand and supply should be left to fluctuate by themselves and equilibrium price is attained by itself in a free flowing market.