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Why might the equilibrium market price of a good change?

The equilibruim market price of a good is simply the price that the good will sell at in a free market. This can be worked out using the supply and demand curves for the consumers and producers of the good; these 'curves' (which actually are ususally straight lines) represent the quantity that producers are willing to sell, and consumers are willing to buy, if the price of this good is a certain level. A supply and demand graph plots these two curves on the same axes, and the equilibruim levels of price and quantity (the levels that will come about in a completely free market) can be found by reading the levels of the graphs axes where the supply and demand curves cross.

Thus, for the equilibruim market price of a good to change, the point at which the supply and demand curves intersect must move to a diferent place on the price axis (usually the y-axis). There are many reasons this could happen, all depending on the factors that influence the supply and demand curves. One of these reasons could be the introduction of a similar product into the market that consumers prefer, especially if this product is cheaper. This would make consumers less willing to buy the good we are analysing, and so the demand curve would be shifted downwards. This is because for a certain price, consumers would be willing to buy fewer of the good than before, as they now know there is a better deal elsewhere. 

Now the demand curve has been shifted downwards, the point at which the supply and demand curves cross has also been shifted downrwards. This means that the equilibruim market price of the good will be decreased.

There are many other reasons for the equilibruim market price, and quantity, of a good to change. If you want to get a better undertsanding of these ideas, or of how to answer a question like this in an exam, why not try brainstorming some other reasons for the supply or demand curves to shift, and writing a response!

Eleanor F. IB Economics tutor, A Level Economics tutor, GCSE Economic...

1 year ago

Answered by Eleanor, an A Level Economics tutor with MyTutor


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