Question

a. What is market equilibrium? Does the market always reach equilibrium? Explain

b. If there is surplus of houses in the market, then the price of houses will rise. True or false. Explain and offer an example.

Answer 1

a) Market equilibrium: Market equilibrium is a situation of a market where market demand is equal to market supply. In the following picture's diagram, point E is the equilibrium point because at point E the market demand curve intersects the market supply curve. This means that at point E the market demand is equal to market supply in the following picture's diagram. So, at point E the market is in an equilibrium situation.

Yes, the market always reaches equilibrium. Because if the price is higher than the equilibrium price level then the market faces a situation of surplus. In the following diagram P is the equilibrium price. Now if the price rises and become P1 then the market faces a situation of excess supply or surplus. Due to excess market supply, the price level falls continuously until it reaches equilibrium price P. Similarly if the price level is less than the equilibrium price level then the market faces a situation of shortage. In the following picture's diagram if the price is P2 then the market faces a situation of excess demand or shortage. Due to excess demands the price level rise continuously until it reaches equilibrium price P. Thus, the market always reaches equilibrium.

b) The answer is False.  

When the market faces a situation of surplus then this means that the market has excess supply. Due to excess market supply, the price level falls continuously until it reaches the equilibrium price level. In the following picture's diagram, E is the equilibrium point where P is the equilibrium price level. Now if the price is P1 then the market faces excess supply or surplus situation. As a result, the price level continuously falls until it reaches the equilibrium price level P. Therefore, the given statement is false.