It does not guarantee total satisfaction on the part of buyer and seller. Only when the price falls would balance be restored.Ī market price is not necessarily a fair price, it is merely an outcome. If that were to happen, producers would be willing to take a lower price in order to sell, and consumers would be induced by lower prices to increase their purchases. Similarly, if a price above P were chosen arbitrarily, the market would be in surplus with too much supply relative to demand. The end result is a rise in price, to P, where supply and demand are in balance. In this event, consumers would choose to pay a higher price in order to get the product they want, while producers would be encouraged by a higher price to bring more of the product onto the market. In such a situation, consumers would clamour for a product that producers would not be willing to supply a shortage would exist. To understand why the balance must occur, examine what happens when there is no balance, such as when market price is below that shown as P in Image 1.Īt any price below P, the quantity demanded is greater than the quantity supplied. It is truly a balance of the market components.
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