6). Price Determination

• Market Equilibrium: A situation that occurs in a market when the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply.

  
• When prices are below equilibrium, this will lead to excess demand and will incentivise firms to increase prices and meet demand. Prices tend to move towards equilibrium.

  
• When prices are above equilibrium, lead to excess supply and force firms to lower prices in order to sell unwanted stock. Prices will always tend to move towards equilibrium.

  
• What is comparative static analysis?


  Comparative static analysis examines the effect on equilibrium of a change in the external conditions affecting a market.
• Affects of demand and supply on equilibrium: