Interactions between demand, supply, and price
What is the concept of market equilibrium?
Market equilibrium refers to the point at which the quantity of a product or service demanded by consumers matches the quantity supplied by producers. At this equilibrium point, there is no excess supply or shortage in the market. The equilibrium price is determined by the intersection of the demand and supply curves, where the quantity demanded equals the quantity supplied. Market equilibrium is influenced by factors such as consumer preferences,prices, production costs, competition, and market dynamics. Changes in any of these factors can shift the equilibrium, leading to changes in prices and quantities in the market. Understanding market equilibrium helps businesses determine appropriate pricing strategies and make informed decisions about production levels and resource allocation.
How do changes in demand and supply affect price?
Changes in demand and supply directly impact price levels. When demand exceeds supply, creating a shortage, the scarcity of the product increases its value, leading to higher prices. In this situation, businesses may raise prices to match the level of demand and maximize profits. Conversely, when supply exceeds demand, creating a surplus, businesses may lower prices to stimulate demand and avoid excess inventory. The interplay between demand and supply dynamics determines the equilibrium price, which represents the price at which demand and supply are balanced. Price adjustments based on changes in demand and supply ensure that market forces align with customer preferences and business profitability.