Examine how market equilibrium is determined and explain why governments intervene in markets. Use diagrams to illustrate your answer.
Equilibrium refers to the idea that there is no tendency to change, and market equilibrium is a situation where the price and the quantity supplied and the quantity demanded of a particular good are equal. The interaction between demand and supply can change the price mechanism which determines the prices and quantity of the goods and services that will be bought and sold in the market.
When there’s no tendency to change in price or quantity, it means that there’s no surplus or shortage of goods and services in the market (diagram 1). If there’s any mismatch in supply and demand, it will be balanced by changes in price and quantity demanded or supplied.
When there’s a surplus of goods and services, there will be a decrease in demand, where supply will be greater than demand, price will fall where firms cut prices to sell surplus and there will be a contraction of supply and an extension of demand. When there’s a shortage of goods and services, consumers bid up prices competing for the available quantity supplied of goods and series, where there’s an extension of supply and a contraction of demand ad there will be a re-established equilibrium price at a higher rate.
Increase in demand will lead to a shift in the demand curve to the right where it will raise both equilibrium price and quantity. When there’s a decrease in demand, the demand will shift to the left where price will drop and there will be an extension in demand and a contraction in supply.
An increase in supply will shift supply to the right, it will lower the equilibrium price and raises the equilibrium quantity. There will be an extension in demand and a contraction in supply. A decrease in supply will shift supply to the right where there will be a raise in the equilibrium price and lowers the equilibrium...