Managerial Economicsintermediate
Explain market equilibrium and the price pressures created by prices above and below equilibrium.
Answer
Market equilibrium is where quantity demanded equals quantity supplied. Below equilibrium, quantity demanded exceeds quantity supplied, creating excess demand and upward pressure on price. Above equilibrium, quantity supplied exceeds quantity demanded, creating excess supply and downward pressure on price.
Explanation
### The concept
At equilibrium, the quantity buyers wish to buy matches the quantity sellers wish to sell. If price is below that level, consumers demand more than firms supply. This excess demand, or shortage, creates pressure for price to rise. If price is above equilibrium, firms supply more than consumers demand. This excess supply, or surplus, creates pressure for price to fall. These pressures describe the direction of adjustment, not a guarantee that every market adjusts instantly.
### What a good answer covers
- Define equilibrium as equality between quantity demanded and quantity supplied.
- Explain excess demand below equilibrium.
- Explain excess supply above equilibrium.
- State the direction of price pressure in each case.
### Terms
- **Equilibrium**: a market position where quantity demanded equals quantity supplied.
### Remember
A shortage pushes price upward; a surplus pushes it downward.
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