Determine how changes in price and quantity influence market equilibrium. Mohamed S. Camara Principles of Economics ECO/212 May 25, 2010 John Hebert To determine how changes in price and quantity influence market equilibrium one must first understand the relationship between demand curve and the supply curve. The amount of good or service that buyers can purchase is the quantity demanded, and the amount of good or service that sellers can sell is the quantity supplied.
The demand curve depicts what occurs to the quantity demanded when its price changes while holding (income, price of related goods or services, taste, expectations, and number of buyers), variables constant that influence the quantity buyers purchase. The demand curve shifts if one variable changes. The supply curve depicts what occurs to the quantity supplied when its price changes while holding (input price, technology, expectations, and number of sellers), variables constant that influence the quantity sellers choose to sell.
The supply curve shifts if one variable changes. The quantity of a good or service sold in a market and its price determination is by the combination of supply and demand curves (N. Mankiw Thomson South-Western, 2007, p. 65). The market’s equilibrium is a point were supply and demand curves cross the equilibrium price and the equilibrium quantity. Markets moves toward the equilibrium of supply and demand based upon the actions of buyers and sellers. The excess in quantity demanded occurs when the market price is above the equilibrium price.
The surplus causes the market price of good or service to fall and suppliers cannot sell what they want. Suppliers respond to the surplus by continuing to lower prices until the market reaches equilibrium. Lowering price increases quantity demanded and decreases quantity supplied. However, when there is a shortage in quantity supplied market price falls below the equilibrium price. The shortage causes the market price to rise and buyers cannot purchase what they want. Sellers espond to the shortage by raising price of good or service until the market again moves toward the equilibrium. When the price rises quantity demanded falls and quantity supplied rises (2007, p. 75). Therefore, buyers and sellers activities are constantly moving the market price toward the equilibrium price. When quantity demanded responds substantially to changes in price is elastic and is inelastic if quantity demanded responds only slightly to changes in the price. References Principles of Economics (4th ed. ) N. Mankiw Thomson South-Western, 2007 Mason, OH