Explain what is meant by the equilibrium price and what happens when there is a

• rise in demand

• rise in supply

equilibrium price is the price where there is no tendency to change. It occurs where quantity demanded = quantity supplied.

In a given price mechanism diagram, a rise in demand could occur because of rise in income.

This leads a rightward shift in the demand curve.

At the original eq P0, the quantity demanded exceeds the quantity supplied. THere is a resultant shortage or excess demand. Due to a shortage of the product, producers are likely to raise the price. Prices thus increase to p2, this is because at P2, there is a new equilibrium where qty dd= qty ss. There is thus no tendency for this price to change. And P2 becomes the new eq price.

Price Mechanism Diagram