Explain how a free working market Will bring the economy to equilibrium. Why is
ID: 1223389 • Letter: E
Question
Explain how a free working market Will bring the economy to equilibrium. Why is equilibrium important? When constructing supply and demand curves we assume that all factors affecting supply and demand remain constant except price. Explain what happens to equilibrium when price changes. Explain what happens to equilibrium when any of the factors, other than price, change. Explain how a free working market Will bring the economy to equilibrium. Why is equilibrium important? When constructing supply and demand curves we assume that all factors affecting supply and demand remain constant except price. Explain what happens to equilibrium when price changes. Explain what happens to equilibrium when any of the factors, other than price, change.Explanation / Answer
IN CASE OF A FREE WORKING ECONOMY THE MARKETS REACHES EQUILIBRIUM BY FINDING A LEVEL WHERE THE DEMAND PRICE AND THE SUPPLY PRICE ARE EQUAL. NOW IF SUPPOSE THE DEMAND FOR A PARTICULAR PRODUCTS STATS TO RISE THEN IT SHORTAGE IN SUPPLY STARTS TO INCREASE THE PRICE ALSO. WHEN THE PRICE INCREASES THE LAW OS SUPPLY COMES INTO PLAY AND SOME MORE SUPPLY OR SUPPLIERS ENTERS THE MARKET AT THIS HIGHER PRICE AND THE DEMAND AND SUPPLY EQUILIBRIUM IS REACHED. AGAIN IN CASE IF THE SUPPLY IS MORE THEN THIS IS HAPPENING AT A HIGHER PRICE, DUE TO INCREASE IN PRICES THE DEMAND STARTS TO FALL DUE A REDUCTION IN DEMAND SOME OF THE SUPPLIERS LEAVES THE MARKET OR LOWERS THEIR PRICES TO MATCH WITH THE DEMAND AND MARKET REACHES EQUILIBRIUM.
THE EQUILIBRIUM IN MARKETS IS NECESSARY TO KEEP MARKETS UNDER CONTROL AND PROPER AVAILABILITY OF GOODS. IF THERE IS NO EQUILIBRIUM THE MARKETS MIGHT HAVE MORE OR LESS SUPPLY OF GOODS AND LOSS OF EFFICIENCY.
WHEN EQUILIBRIUM CHANGES DUE TO PRICE THEN DEMAND OR SUPPLY CURVE WILL SHIFT FROM ITS PLACE TO THE LEFT OR RIGHT AND MARKET WILL BE LEFT OUT OF ORIGINAL EQUILIBRIUM. THE PRICE WILL CORRECT ITSELF TO REACH THE EQUILIBRIUM.
IN CASE OF NON PRICE FACTORS OF CHANGE THE DEMAND OR THE SUPPLY WILL SHIFT AND A NEW EQUILIBRIUM LEVEL WILL BE SET.
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