Question 2 a. What is market equilibrium? Does the market always reach equilibrium? Hint: Discuss and...

Question 2

a. What is market equilibrium? Does the market always reach equilibrium? Hint: Discuss and illustrate using demand and supply. See how to interpret graphs and the concept of market equilibrium on pages(54-55)

b. If there is surplus of houses in the market, then the price of houses will rise. True or false. Explain with the use of graph(s).

Solutions

Expert Solution

Answer : 2) a) Market equilibrium : Market equilibrium is a situation of 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 equilibrium situation.

Yes, the market always reach at equilibrium. Because if 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 price rise and become P1 then the market face a situation of excess supply or surplus. Due to excess market supply the price level fall continuously until it reaches to 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 price is P2 then the market faces a situation of excess demand or shortage. Due excess demand the price level rise continuously until it reaches to equilibrium price P. Thus, the market always reach at 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 fall continuously until it reaches to 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 fall until it reaches to equilibrium price level P. Therefore, the given statement is false.

Rahul Sunny answered 1 year ago

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