In any market, the attainment of market equilibrium is of great essence. Market equilibrium is a situation where by the quantity demanded of goods equals the quantity supplied of goods. The point of interaction between the two curves, that is, the supply curve and the demand curve gives the equilibrium quantity and the equilibrium price . Market equilibrium as stated earlier is of essence in an economy in order to avoid the problem of inflation or deflation. The following paper will look at how market equilibrium is obtained when prices increase and quantity produced goes down.
Price is the major factor or aspect that is used in the market to control the quantity demanded of products and as such it is important in the attainment of equilibrium. Increased demand in the market may be as a result of increased preference on a product by the consumer, relatively low prices of the product, scarcity of a substitute or increase in prices of the substitutes to a product. As such, excess demand is created and demand exceeds supply which results in lack of equilibrium in the market. The price of a commodity may increase due to increased cost of production and therefore this may affect the quantity of a product produced. The quantity produced would tend to reduce resulting in the shifting of the supply curve . In order to attain equilibrium, price is the factor that is brought into play. Increasing the price of the commodity would significantly reduce the demand of the product. This is because not all consumers will be able to afford the commodity. Prices will increase up to a point where demand will equal supply and as such equilibrium will be attained. The increase in price would lead to a decrease in the quantity demanded. The demand curve would shift and equilibrium would be attained where it interacts with the supply curve.
This form of equilibrium may not be desirable i.e. the case that the quantity produced goes down. This is so due to the fact that there would be scarcity of the resource as a result of low production of the commodity which often results to excessive demand and increased prices of the commodity.
References
Marshall, A. (2013). Principles of Economics. New York: John Wiley and Sons.
Prasch, R. E. (2008). How Markets Work: Supply, Demand and the 'real World'. London: Blackwell Publishers.
