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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

What determines the level of prices in a market?

To determine

What are the forces that determine the price level in a market?

Explanation

The forces of demand and supply of a product determines the price level in the market. The intersection of demand and supply curves determines the equilibrium price and quantity in the market where demand of a product is equal to the supply of the product.

In the below diagram, the equilibrium price level is P. Any price below the equilibrium price level say, P-1 shows the situation of excess demand or shortage of a product. Here, the demand is more than supply of a product. The competition among buyers will emerge; they will push up the prices in order to buy the product, so price starts rises. As price rises, supply also rises. This tendency of rising price continues until the equilibrium price level of P is achieved...

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