Freely functioning markets tend to arrive at their own equilibrium. Briefly state why this statement is...
Freely functioning markets tend to arrive at their own equilibrium. Briefly state why this statement is generally true.
Homework Answers
This happens because of the invisible forces of market demand and market supply that force the price level to reach the market clearing one. Suppose that there is a free market in which the price is greater than the market clearing price at which quantity demanded and quantity supplied are equal to each other. Because there is currently a surplus of goods, suppliers will be willing to clear off their inventory and they will reduce the price of their products. As soon as the price decreases the consumer will start purchasing more and more units. As the prices starts falling, quantity demanded increases and quantity supplied decrease is and finally the price reaches the market equilibrium at which there is no surplus.
Similarly a shortage is eliminated when the price is increased. Due to this reason free functioning markets automatically reach their own equilibrium by the forces of demand and supply.
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