Fiscal monetay policy

For equilibrium price the demand curve slopes downwards, this means that, other remaining equal, more quantity of a commodity will be demanded at a lower price than a higher price. Similarly the supply curve of the commodity normally slopes upwards. This means that the producer will offer to sell a larger quantity of the products at a higher price than a lower price. Thus the quantity demanded and the quantity supplied varies with price. The price which will tend to settle down or come to stay in the market is one at which the quantity demanded is equal to the quantity supplied.

This price, at which demand and supply are equal, is know as an equilibrium price, since at this price, the forces of demand and supply are balanced or are in equilibrium. When price falls below equilibrium, demand for the good increases which in turn surpass supply. This creates a shortfall of the goods in the market. Suppliers respond to this shortage by increasing the price. The price would therefore be increased until it reaches the equilibrium point. The converse is true; If price gets beyond the equilibrium point, suppliers would supply more of the good (Law of Supply).

There would be competition amongst the suppliers to sell surplus. The end result would be a reduction of prices until the point of equilibrium. Diagrammatically, this is represented as below. s Surplus Price p Equilibrium Deficit Demand Q Quantity Figure1: equilibrium price Therefore the equilibrium between demand and supply or market equilibrium determines the price in the market. Prices come to stay in the market at the level where price come to stay in the market at the level where demand and supply curves intersect each other.

2. As shown in figure 2 above SS is the supply curve and DD is the demand from DD to D’D’ the supply curve remaining in the same equilibrium price will rise to op are which the new demand curve D’D’ intersects the supply curve SS at the point R. a result of increase in demand, equilibrium amount demand and supplied will also rise to oq’. On the contrary, if the demand decreases from DD to D’D’ the equilibrium price will fall to op and equilibrium will fall from QP to Q1P1’