Market Equilibrium- Asifa Kwong Examine how market equilibrium is determined and explain why governments intervene in markets. Use diagrams to illustrate your answer. Equilibrium refers to the idea that there is no tendency to change, and market equilibrium is a situation where the price and the quantity supplied and the quantity demanded of a particular good are equal. The interaction between demand and supply can change the price mechanism which determines the prices and quantity of the goods and services that will be bought and sold in the market.
When there’s no tendency to change in price or quantity, it means that there’s no surplus or shortage of goods and services in the market (diagram 1). If there’s any mismatch in supply and demand, it will be balanced by changes in price and quantity demanded or supplied. When there’s a surplus of goods and services, there will be a decrease in demand, where supply will be greater than demand, price will fall where firms cut prices to sell surplus and there will be a contraction of supply and an extension of demand.
When there’s a shortage of goods and services, consumers bid up prices competing for the available quantity supplied of goods and series, where there’s an extension of supply and a contraction of demand ad there will be a re-established equilibrium price at a higher rate. Increase in demand will lead to a shift in the demand curve to the right where it will raise both equilibrium price and quantity. When there’s a decrease in demand, the demand will shift to the left where price will drop and there will be an extension in demand and a contraction in supply.
An increase in supply will shift supply to the right, it will lower the equilibrium price and raises the equilibrium quantity. There will be an extension in demand and a contraction in supply. A decrease in supply will shift supply to the right where there will be a raise in the equilibrium price and lowers the equilibrium quantity. When the market prices for goods and services in the product markets is considered to be too high or too low, market failure may occur where the price mechanism may take account of private benefits and costs of production but doesn’t take into account social cost and benefits.
This is when the government intervenes in the market. When the government feels that the market determined price for some goods and services is too high or too low, the government may intervene in the marketplace in order to make changes to these goods and services. Governments impose price ceiling and floor prices in order to intervene the market prices. Price ceiling is the maximum price that can be charged for a good or service. For example, the petrol prices in the market maybe too high so the government would set a ceiling price that it can’t be higher than a particular amount.
Floor price refers to the minimum price that can be charged for a particular good or services, it is established below market equilibrium. For example, the government may think that the market price for wheat is too low, so it may impose a floor price which will lead to an increase in the price of wheat and the market will be in disequilibrium. There are often failure of private sector to provide goods and services. The government may intervene in order to encourage the provision of merit goods like public education that have positive externalities, through subsidies to consumers to lower prices and increases consumption.
Provision of public good, e. g. public road and police services, are not provided by individual firms at all, so the government intervenes to supply these public goods and finances them with its tax revenue. Protection of the environmental goods like air, water is intervening by the government where government may set taxes like the carbon tax to control the pollution level. In a government influence market, we would have pure competition in the marketplace where there’s no government intervention at all.
This shows that no one in the market has the power to influence the market outcomes directly. The prices of the market will be determined by its supply and demand in the market system. With a regulated market where there’s government intervention, the price mechanism can be changed depending on the government influence. Therefore, a regulated market can be controlled so that it can be more secured and safe where the price of goods and services is at a rage that people in the economy can effort so that our standard of living can increase.