Essay 3

Explain how an equilibrium price for a product is established in the market and how it may change

Equilibrium price is a price that buyers are willing to pay is same as the price that the sellers are willing to accept and all goods sellers want to sell are cleared. 

At Price P1, the quantity Q1 is both demanded and supplied. The market is in equilibrium at price P1 since the amount of kiwi that consumers wish to buy at that price is equal to the amount of kiwi suppliers wish to sell at that price. 

Before every price equilibrium is achieved, producers will do price and quantity of stock adjustments.

If producers set the original price of kiwi at P1, the quantity supplied of kiwi is at Q1 but the quantity demanded of kiwis are at Q2. A shortage of kiwis occurs. Producers then increases the price from P1 to P2. The quantity demanded decreases from Q2 to Q3 when price increases. Quantity supplied is also at Q3. A price equilibrium has been achieved. 

When producers set the price at P1, the quantity supplied is at Q1 but the quantity demanded is at Q2. This causes a surplus of kiwis. Producers will then decrease the price from P1 to P2 . The quantity demanded increases from Q2 to Q3 when price decreases. The quantity supplied at price P2 is also at Q3. A price equilibrium has been achieved. 

The established equilibrium price in a market may change over a period of time. When consumers changes their preference in fruits, for example, consumers prefer apples that year and leads to a decrease in quantity demanded for kiwis. The demand curve will shift from D1 to D2. At P1, the quantity supplied at quantity demanded is at Q1. When the demand curve shifts from D1 to D2, at P1, the quantity demanded is at Q2 but the quantity supplied is at Q1. This causes a surplus of kiwis from Q2 to Q1. Producers will then have to do some price and quantity of stock adjustments to find its new price equilibrium. When the price decreases from P1 to P2, the quantity supplied and quantity demanded are both at Q3. The equilibrium price has been achieved.