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Question

What will happen if the price prevailing in the market is
(i) above the equilibrium price?
(ii) below the equilibrium price?

Solution
Verified by Toppr

The equilibrium price is the price at which market demand and market supply are equal to each other.

(i) When price prevailing in the market is above the equilibrium price, demand will be less than supply, i.e., there is excess supply in the market. Excess supply will force the market price to slide down causing extension of demand and contraction of supply. The process of extension and contraction would continue till the equilibrium between supply and demand is struck. Thus, equilibrium price will be restored through the free play of market forces.

(ii) When price prevailing in the market is below the equilibrium price, demand will be more than supply, i.e., there is excess demand in the market. pressure of excess demand will cause a rise in market price causing contraction of demand and extension of supply. The process of contraction and extension would continue till the equilibrium between supply and demand is struck. Equilibrium price will again be restored through the free play of market forces.

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