1. Explain the concepts of supply, demand, and market equilibrium. How is equilibrium achieved? What factors can disrupt that equilibrium and what happens when equilibrium is disrupted? How do some government policies interfere with market equilibrium?
... it that will be supplied. As the price of a product increases, producers will be willing to supply more. Correspondingly they will supply less, if the price declines. Supply is the amount of a good producers are willing and able to sell at a given price. Supply depends on: · the price of the good; · the cost of making the good; · the supply of alternative goods the producer could make with the same resources (competitive supply); · the supply of goods actually produced at the same time (joint supply); · unexpected events that affect supply. In economic theory, the interaction of supply and demand is understood as equilibrium. We may think of demand as a force tending to increase the price of a good, and of supply as a force tending to reduce the price. When the two forces balance one another, the price would neither rise nor fall, but would be stable. This analogy leads us to the stable or natural price in a particular market as the "equilibrium" price. At prices above the equilibrium there is excess supply while at prices below the equilibrium there is excess demand. The effect of excess supply is to force the price down, while excess demand creates shortages and forces the price up. The price where the amount consumers want to buy equals the amount producers are prepared to sell is the market equilibrium. The following factors will disrupt the equilibrium: 1) An increase in demand will cause an increase in both the equilibrium price and quantity. 2) A decrease in demand will cause a decrease in both the equilibrium price and ...