Question

The equilibrium price of a product which is sold in a free, open and competitive market is determined by the market demand and the market supply of the product. However, sometimes the current market price of the product is not at its equilibrium level.

- Explain how and why the equilibrium price of the product will be reached.

- Provide a simple numerical example and draw a graph in order to support your explanation.

Answer 1

At the point when cost is higher than $5, state it is $8, amount requested gets 70 while provided gets 120. This prompts surplus in the economy with flexibly surpassing interest. This causes makers to create less to and lessen flexibly, which squeezes costs, till the point costs tumble to harmony level.

Also, when cost is lower than $5, state it is $3, amount requested gets 110 while provided gets 80. This prompts deficiency in the economy with request surpassing gracefully. This causes makers to create more to and increment gracefully, which squeezes costs, till the point costs increment to balance level.

This is the manner by which balance component works.

Attributes of free market economy:

1. Minimum government mediation.
2. Complete proprietorship by private players.
3. Profit is a definitive thought process of creation.
4. High rivalry in the market.

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