Explain why the price in competitive markets settles down at the equilibrium intersection of supply and demand
Answer:
I believe a couple of the previous answers may be a bit incomplete.
The demand curve is a curve for a reason. It simply states the quantities of a product that are demanded for every given price level. There is a maximum price (above which no quantity is demanded; it is simply too expensive for every consumer) and a maximum quantity (the quantity that would be demanded if the product were free). At all points in between, there is a specific price and a specific quantity to match the price.
The price of the product is determined, in a competetive scenario, by the supply curve for that product. The supply curve conveys the producer's incentives to produce a certain quantity of the product at each given price level. Obviously, if the producer can sell the product for a high price, he will want to produce lots of the product, while at low prices, he does not have the same quantity incentives.
Why is the intersection of the two curves important?
Suppose we are able to find the optimal price and quantity levels (as in the intersection of the S and D curves) at (10,10). In other words, 10 products can be sold at a price of $10 each.
Let us assume that the price starts out too high, say at $12. With a price of $12, producers will want to produce more than 10 units, for example, 12 units. At the same time, however, consumers reply to the higher price will smaller demand, such as 8 units. Now there is a problem. Producers have made 12 units to sell at $12 each, and consumers are only going to buy 8 units. There is a surplus of 4 units, and this surplus causes both consumers and producers to be worse off. The realistic solution here is for producers to lower the price and produce less of the product until the surplus is eliminated (at 10 and $10).
It's easy to see what happens when the price is too low now. With a lower price, producers produce less than 10 and consumers demand more than 10, and now there is a shortage. The producers are now missing out on additional units they could produce and sell if the price were higher, and consumers are missing out because they can only buy the inadequate amount that is being produced. The solution is, naturally, for the producers to raise the price and make more until the shortage is eliminated.
There are obviously many more factors and consequences at play here, but that was just a basic summary. Hope that helped you understand a bit better.
it adjust to the equilibrium, if a company produces a good at a certain price, and it is not purchased the tend to lower the price,, if they produce to little and many ppl want it, they must raise the price to meet their supply, and lower demand, this all happens at the equilibrium.
At eqm there every good brought to the market is exchanged at the eqm price.
OK if we are not at eqm, then that is not the case why?
if the market price is above eqm price then suppliers see the market price as higher and bring more goods to the market then if the price was the eqm price(law of supply). At the same time demanders see a higher price and want less of the good then if the price was at eqm (law of demand). So we have more bring brought to market then what demander want to buy. Each individual suppliers need to sell the goods they brought so they lower the price so they can be the one to sell their goods. As they do this all suppliers do the same. This lowers the market price leading to the quantity supllied to the market to decrease; at the same time as the price is being lowered demanders begin seeing lower prices urging more quantity to be demanded. This continues until the Q supplied = Q demaned so there is no reason to change the price.
You can do the opposite if market price starts below with this time demanders bidding for the shortage of goods
It settles down because if you charge a higer price (above the equilibrium) customers would simply buy from the competitiors, and if you charge below the equilibrium you would not gain back the costs of the item you are selling and in the long run you would eventually have to shut down
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