When the market price is below its equilibrium value, with all else remaining equal, the demand for the good will rise, shifting the demand curve. The system will then move back into equilibrium with the new price and demand.
The market price is below the equilibrium price.
Excess Supply
There are a number of things that will happen to prices set below market equilibrium. They will cause a high demand and this will result in limited supply due to the low prices.
A price ceiling is binding when it is below the equilibrium price. It is the legal maximum price, so the market wants to reach equilibrium (which is above that) but can't legally. If it were above the equilibrium price it would not be binding because the market would reach equilibrium and the ceiling would have no effect. A price floor is binding when it is above the equilibrium price. You can use similar reasoning to that above. It is the legal minimum price. the market wants to reach equilibrium below that but can't legally.
below equilibrium price and causes a shortage
The market price is below the equilibrium price.
Excess Supply
There are a number of things that will happen to prices set below market equilibrium. They will cause a high demand and this will result in limited supply due to the low prices.
The equilibrium quantity supplied is lower than the actual quantity supplied. The market price is below the equilibrium price.
A price ceiling is binding when it is below the equilibrium price. It is the legal maximum price, so the market wants to reach equilibrium (which is above that) but can't legally. If it were above the equilibrium price it would not be binding because the market would reach equilibrium and the ceiling would have no effect. A price floor is binding when it is above the equilibrium price. You can use similar reasoning to that above. It is the legal minimum price. the market wants to reach equilibrium below that but can't legally.
below equilibrium price and causes a shortage
Quantity of demand increases and supplies decreases.
above equilibrium
If the fixed rate is set below market equilibrium , the central bank plays an important roll as follows: 1) They will not return the money anyone invested 2) They can bully the government to give them money 3) They will stole another banks money for their need 4) They will encounter police
Artificially keeping the price of a commodity below market value by governments (usually by selling massive quantities) is to try and achieve the appearance of a greater value in something else.
If the price ceiling is above equilibrium: no effect. If the price ceiling is below equilibrium: price lowers to the ceiling level and supply falls. There is too much demand for the current level of supply. A black market forms to capture unmet demand at high prices.
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