When does price remain below the equilibrium ?
When does price remain above the equilibrium ?
What is economics cost and law of increasing cost ?
Excess demand is created when price is set below the equilibrium price.
qs=-400+2p qd=1600-2p how do i graph that
In economics, the concept of equilibrium refers to the state where the supply of a good or service matches the demand for it, resulting in a stable price. However, there are situations when the price remains above or below the equilibrium.
1. When does price remain below the equilibrium?
When the price of a good or service remains below the equilibrium, it indicates a shortage in the market. This typically happens when the demand for a particular item exceeds its supply, creating an imbalance. As a result, sellers may struggle to keep up with the demand, causing the price to remain low. To determine the specific conditions causing the shortage, it is necessary to analyze factors such as changes in consumer preferences, population growth, or disruptions in production or distribution.
2. When does price remain above the equilibrium?
Conversely, when the price of a good or service remains above the equilibrium, it signals a surplus in the market. This occurs when the supply of a product outweighs the demand for it, leading to excess inventory. As a result, sellers may reduce prices to stimulate demand and clear the surplus. The factors that contribute to a surplus can vary, including changes in consumer tastes, technological advancements that increase production efficiency, or a decrease in demand due to economic downturns.
Now, let's discuss the concept of economic cost and the law of increasing cost:
- Economic Cost: Economic cost refers to the total cost of producing a good or service, taking into account both explicit costs (actual expenses like raw materials, labor, rent, and utilities) and implicit costs (opportunity costs associated with alternative uses of resources, such as foregone income or benefits from other opportunities).
- Law of Increasing Cost: The law of increasing cost states that as the production of a good or service increases, the opportunity cost of producing an additional unit rises. This occurs because resources are not infinitely adaptable and have varying levels of efficiency in the production of different goods. As a firm specializes and expands production in one area, it may have to allocate resources with less expertise or suitability, leading to diminishing returns and higher production costs.
It's important to note that the law of increasing cost does not imply that the cost of producing all goods will increase indefinitely. It simply suggests that there is a tendency for costs to rise as production increases due to resource limitations and diminishing returns.