Question
Asked Oct 31, 2019
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Explain how the market moves to equilibrium in terms of shortages and surpluses and in terms of maximum buying prices and minimum selling prices.

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Expert Answer

Step 1

The equilibrium price and quantity are determined by the intersection of demand and supply curves in the economy. At this level, there will neither be shortage nor surplus of goods.

Step 2

In case of surplus, there is excess of supply over demand. The price is above the equilibrium price. In this case as the sellers have extra commodities, they will be willing to lower the prices and thus sell more of extra goods by increasing demand. This process will ultimately bring the equilibrium.

In case of shortages, there is excess of demand over supply. The price is below the equilibrium price. In this case as the sellers have few commodities to sell, they will be willing to increase the prices and thus sell more goods by increasing the supply and thus achieving the demand by the consumers. This process will ultimately bring the equilibrium

Step 3

When prices of good are not allowed to bring demand and supply to equilibrium, mechanisms used to allocate resources are:

When there is shortage of the good in the economy, Price ceiling (maximum selling price) can be used to increase the price above the equilibrium level.  When there are shortage producers can ration the goods according to person...

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