Question

If equilibrium price of a good is greater than its market price, explain all the changes that will take place in the market. Use diagram.

Answer 1

When equilibrium price of a good is more than its market price, then there will be competition among the buyers. This is because when the equilibrium price of a good is above the market price then it implies that there is a situation of excess demand.

This is explained with the help of the following diagram

From the above figure, we can analyse that the market demand curve DD  and the market supply curve SS intersects each other at the point ‘E’, which is known as equilibrium. The corresponding price and quantity are regarded as equilibrium price and equilibrium quantity, Op_e and  Oq_e.

Now, suppose the equilibrium price is more than the market price which is denoted by  P₀ . In other words, if the market price is below the equilibrium price then at this price the market demand is more than the market supply. So this implies that there is a situation of excess demand. Thus, due to this there will exist competition among the buyers.