Question

In an answer of at least two well-developed paragraphs, explain how supply and demand work together to reach the equilibrium price in the marketplace.

Answer 1

Solution-

Suppose the market demand is more than the market supply. To purchase the good, a customer would be willing to pay a higher price than the current market price because the goods are in shortage. This would push up the price of the good. At a higher price, supplier would be willing to supply more goods while as the price is pushed higher, the customer will wish to purchase lesser goods (as he has a fixed budget). Thus, as the price will increase, supply will rise and demand will fall until it reaches a point where demand equals supply, and the market is at an equilibrium. This price is called the equilibrium price.

Similarly, if supply is more than demand, suppliers will push down price to attract more customers. At a lower price, customers will have a higher demand (as they can get more for the same price) while producers will sell less (as they have a lower profit). Thus, as price is pushed downwards, supply will fall and demand rise until it reaches the equilibrium price.