All you need to know about Market Mechanism

Equilibrium is defined as a quantity supplied of a commodity equal to the amount demanded of a thing.

The equilibrium price is the price at which the quantity supplied for a commodity is equal to the amount demanded by a thing. Therefore, equilibrium price refers to that price at which consumers wish to buy the same quantity of the commodity that producers are willing to sell.

Market Mechanism

Determination of Equilibrium Price and Quantity: –

There is a mark of DD, which shows a demand curve, and SS, which shows the supply curve. There is an equilibrium price where the demand curve intersects the supply curve. This is the point where the quantity demanded is equal to the amount supplied. The OP shows the equilibrium price, and OQ shows the equilibrium quantity. 

If the price rises, the quantity demanded decreases, due to which the consumers who were in a position to afford this commodity now would not be able to purchase it at the rising price. Contrarily, as the seller would like to produce more at a higher price to earn profits, the supply would increase.

The situation of excess supply would be created as there will be an increase in quantity supplied and a decrease in the amount demanded. To attract more buyers, the sellers would reduce the price to dispose of their surplus stock. 

Contrarily, if the price falls, the quantity demanded will increase, due to which many consumers who were not in a position to afford this commodity at a rising price would be able to purchase this commodity at a low price.

There will be a situation of excess demand since the demand will be more than the supply. The excess of need will signify that there would be many consumers now who would not get the commodity at a reasonable price.

To get this commodity, they will offer a higher price. Therefore, since there is competition between the buyer, the price will rise, and gradually it will be equal to the equilibrium price. 

A stable equilibrium is defined as the one that would bring forces into operation if displaced because of some small hurdles, which will help restore the initial equilibrium price. We need to clearly understand how to determine the equilibrium price and quantity for effective assignment help or economics homework help.

There are various effects of the change in demand and supply on the equilibrium price: 

  1. Effects of change in Demand on Equilibrium Price and Quantity: When the demand increases, supply remains the same, equilibrium price and equilibrium quantity increase. When demand decreases, supply remains the same, equilibrium price and equilibrium quantity both fall. 
  2. Effect of change in Supply on Equilibrium Price and quantity: When supply increases and demand remains constant, equilibrium price falls, and equilibrium quantity remains the same. When supply decreases and demand remains steady, equilibrium price rises, and equilibrium quantity falls. 
  3. When equilibrium price remains same: Equilibrium price remains same with change in demand and supply simultaneously. There should be an equal change in demand and supply.
  4. When equilibrium price rises: Change in demand is more than a change in supply. 
  5. When equilibrium price falls: Change in supply is more than the change in demand.

Maximum Price legislation or Price Ceiling: –

A price ceiling is the maximum permissible legal price at which a supplier can charge for its product. It is an effective tool of the government, which the government imposes in a situation of several food shortages to protect the interest of consumers, especially those who are poor consumers. There are the following implications of the price ceiling:

  • Effect on Price and Quantity: The price ceiling is only meaningful when placed below the equilibrium. A price ceiling is effective when applied in a situation of excessive demand where the price tends to rise due to the shortage of goods.
  • Allocation of available supply:
  1. First Come, First Served: Under this method, the government satisfies the person who approaches it first. It is commonly followed in the cases of kerosene, petroleum, etc.
  2. Allocation by Sellers’ Preferences: in this method, the seller or the shopkeeper decides who will get the scarce product. He can only offer it to his regular customers.
  3. Rationing: Rationing refers to the system of disturbance of a specific quantity of a commodity at a price that the government is fixing.

The government issues ration cards to each family with the help of which a specific quantity of the product can be bought at a fixed price.

  • The emergence of black marketing: Black market refers to a market where the goods are being sold illegally at higher prices than a fixed price unlawfully by the government. Since the price ceiling is placed in excess demand, sellers always have the policy to sell their commodities at a higher price to make quick and increased profits.

Minimum Price legislation or price flooring: –

Minimum price legislation is the price at which the seller will sell their product. Price flooring is beneficial to the supplier of a good or service. There are few implications of price flooring:

  • Price flooring is always set above the equilibrium price in a situation of excess supply. The producers have a slight disadvantage in excess supply as the price of the commodity tends to fall. When prices fall, the producers will incur the fear of loss.
  • In the process of buffer stock, the government purchases the unsold inventory, which is at the time of excess supply, and then distributes it to the public during natural calamities.

These few points about the market mechanisms would assist students in academic solutions and provide them reliable Economics homework help.


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