Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium
answers
When the demand for oranges increases, it means that consumers now desire more oranges at the existing price. This leads to an imbalance in the market, as the quantity demanded exceeds the quantity supplied. In order to restore market equilibrium, the rationing function of price comes into play.
The rationing function of price refers to the role of prices in allocating goods and services when there is scarcity. In this scenario, as the demand for oranges increases, the price of oranges will typically rise. This increase in price serves two purposes.
First, a higher price acts as a signal to producers that there is increased demand for oranges. In response, producers are motivated to increase their output to take advantage of the higher price. Thus, the quantity supplied of oranges rises.
Second, a higher price also acts as a signal to consumers to reduce their demand for oranges. As the price increases, some consumers may decide that oranges have become too expensive or choose alternative fruits. As a result, the quantity demanded of oranges decreases.
As the price increases, the quantity demanded and the quantity supplied start to come closer together. This process continues until a new equilibrium is reached, where the quantity demanded equals the quantity supplied. At this point, the market is in balance, and the rationing function of price has successfully restored market equilibrium.
In summary, when the demand for oranges increases, the rationing function of price restores market equilibrium by motivating producers to increase their supply and prompting consumers to reduce their demand, ultimately leading to a new equilibrium point where supply and demand are once again balanced.