Explain the chain effects, if the prevailing market price is below the equilibrium price.

Dear Student,
When prevailing market price is less than the equilibrium price at that time demand become greater than supply and excess demand emerges. Since buyers will not be able to buy all they want to buy, there is competition between buyers to rise in price. Rise in price causes fall in demand (contraction) and rise in supply (expansion). This continues till the price reaches equilibrium again.

(i) The excess demand of Q1 Q2 results in competition amongst the buyers as each buyer wants to have the commodity. It leads to increase in market price.
(ii) Increase in price results in contraction along the demand curve and expansion along the supply curve.
​​​​​​(iii) The market price will continue to rise till excess demand is wiped out.
Eventually price will increase to a level where market demand is equal to market supply at OQ and equilibrium price of OP will be attained.

Regards
 

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