Economics and Growth

Causes of increase in equilibrium price

Equilibrium price is the price at which the quantity demanded in the market by consumers balances with the quantity supplied in the market by the suppliers (Gillespie 2007). Apparently, there are a range of factors that determines a specific commodity’s supply and demand at the market place. Consequently, changes in these factors influences the shifts in the equilibrium price of that commodity (Sloman, 2007, p. 51-182). For instance, assuming the supply of a commodity is invariable, if there is a positive change in buyers’ income sources causing its increment or if tastes as well as preferences of the consumers shift in regard to the particular commodity under consideration. In essence, the effect of such changes is that, the demand for that commodity will increase, causing the demand curve to shift upwards (Begg, Fischer, and Dornbusch, 2003). Therefore, a new and higher equilibrium price as well as quantity is achieved in the market. This is because, an outward change in the demand curve gives rise to a shift, also called expansion, along the supply curve coupled with an increase in equilibrium price as well as quantity. In such a case, suppliers will increase quantity of their supplies because of the higher equilibrium price, thus gain more from sales (Begg, Fischer, and Dornbusch, 2003).

Also, (Sloman, 2007, p. 51-182) the other precedent for the rise in equilibrium price is the reduction in supply of that commodity. Basically, with the demand of a commodity held constant, a change in critical supply factors such as an increase in the cost of production of that particular commodity or if the government intervenes by cutting off incentives to producers in terms of subsidies, which in ...

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...e resultant effects are; increased demand for the commodity as well as a decline in supply of that commodity. The quantity supplied will reduce up to a level where the quantity demanded in the market equals that which is supplied. Evidently, at this point of balance, any surplus in the market in terms of demand and supply will have been dealt away with, hence a market equilibrium attained (Begg, Fischer, and Dornbusch, 2003). In brief, it is adjustment of the forces of demand as well as supply, which eventually leads to equilibrium price in the short run and even in the long run.

Works Cited

Begg, D., Fischer, S. and Dornbusch, R. 2003. Foundations of Economics. New York: McGraw Hill. 2003.

Gillespie, A., 2007. Foundations of Economics. London: Oxford University Press.

Sloman, J., 2007. Essentials of Economics. New Jersey: Financial Times Prentice Hall. 2007