A). Why is it important for the market to establish an equilibrium price for a product or service?
The market finds it necessary to come up with an equilibrium price given that this is the point where goods can be allocated in the most efficient manner. This is because it is assumed that when the prices are at equilibrium the market does not experience either a surplus or a shortage. As such, this economic condition is deemed to be satisfactory by all the firms and individuals since at equilibrium price, whatever goods are being supplied is equal to the level of demand in the market (Black, 2013, p. 26).
(B). what is the benefit to the company of the equilibrium price?
Companies find it beneficial to identify the equilibrium price because it serves as a guide on how much they can charge for each unit of their products. The equilibrium price provides them with a price that is more ideal for which they can charge their products and still make a profit after having covered all the expenses incurred in the production of those goods and services (Black, 2013, p. 30). Consequently, the company is able to realize optimum sales because the equilibrium price makes it possible for them to attract enough customers. (C). If the equilibrium price increases, what effect will that have on the company? If the equilibrium price decreases, what effect will that have on the company?
An increase in equilibrium price will lead the company to experience a decline in the level of its sales (Kim, 2006, p. 29). This will result from allocative inefficiency because when the price increases the company will become motivated to produce more products. However, the increase in price will cause the company’s products to be less attractive and as such, the quantity demanded of the products will decline. This will in effect mean that less purchase will be made by consumers and generally the company will make low sales. Additionally, the company will have a surplus given that they have produced more than what the consumers are demanding.
On the other hand, when the equilibrium price decreases the company will experience a high sales volume. This will also be a result of allocative inefficiency because the company will be demotivated by the low price and thus they will not produce enough products. The low price will make the company’s products attractive and this will lead the consumers to demand more than what the company is actually producing (Tieben, 2012, p. 50). Generally, the company will sell all the products they have made and they will even have a shortage because the consumers demand for their products exceeds their supply of those products.
References
Black, K. (2013). Business cycles and equilibrium. Hoboken, N.J: Wiley.
Kim, K. (2006). Equilibrium business cycle theory in historical perspective. New York:
Cambridge University.
Tieben, B. (2012). The concept of equilibrium in different economic traditions: An historical
Investigation. Cheltenham: Edward Elgar Pub.m
