Use a supply and demand diagram for cars to illustrate the equilibrium price and quantity. Define...

Use a supply and demand diagram for cars to illustrate the equilibrium price and quantity. Define the equilibrium price and the equilibrium quantity. What happens if the price is above equilibrium? What happens when the price is below equilibrium? Relate the diagram to the law of demand. Relate the diagram to the law of supply. Be sure to refer to the diagram in your discussion.

Expert Solution

D curve represents demand for cars whereas S curve is the supply. The intersection gives the market equilibrium. The Quantity Q corresponding to the intersection of demand and supply curves is the equilibrium quantity for cars. The Price P corresponding to the intersection of demand and supply curves is the equilibrium price for cars.

If the price is set above the equilibrium then demand for cars will be lower than that of in equilibrium and supply of cars will be greater than that of in equilibrium. This is because, other things remaining equal demand for good falls with increase in price and supply of goods increases with increase in price. Thus, at P which is now above equilibrium, excess supply or surplus of (Q2-Q1) quantity of cars will be created in the market. If free forces are allowed to work then price will fall to restore the equibrium as the suppliers would not find sufficient buyers at that price. Due to excess supply price will fall till demand and supply gets equalled.

When price is set below the equilibrium, then demand for cars will be higher than that of in equilibrium and supply of cars will be lower than that of in equilibrium. This is because, other things remaining equal demand for good increases with decrease in price and supply of goods falls with increases with fall in price. Thus, at P which is now below the equilibrium, excess demand or shortage of (Q2-Q1) quantity of cars will be created in the market. If free forces are allowed to work then price will increase to restore the equibrium as due to excess demand price will increase till demand and supply gets equalled.

Rahul Sunny answered 2 years ago

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