Explain how supply and demand interact to determine equilibrium price and output?

Answer

I shall answer the question from an Economics point of view. You might need to draw a diagram to understand the question better. Lets say that the initial equilibrium price and quantity is stable, where the demand and supply curves intersect each other. I shall use the market for console games for relevance. Lets say the price of Play Station 3 is initially priced at USD 300. ( my apologies for this figure as it might seem weird, it's only an example, as I have no idea how much it costs ). At this price, we can say that that is the equilibrium price of the PS3, and the equilibrium quantity is lets say 1000 units. However the equilibrium price and quantity can change depending on changes in the supply and demand in the market, hence the question is asking how the interaction between demand and supply can determine the price and output. Let assume that the demand for PS3 increases, this can happen is real life during holiday season or before Christmas. If this happens, in a graph, the demand graph will shift out. An increase in the demand while the supply remains the same, means there is excess demand of PS3 in the market. This means there are a lot of people who wants to buy the PS3 but there are too little in the market or insufficient amount supplied. If this happens, the price will increase. ( this is very normal in Economics, when there exists excess demand the value of the good increases ). The increase in the price, will thus form the new equilibrium price and quantity. We can say that the excess demand have caused the price of PS3 to increase, and only a few can purchase it. This is one example of the interaction of demand and supply to determine the equilibrium price and quantity. At times, it's not only the demand that can affect the price and quantity. There are times where the supply can affect the price of a good. If excess demand causes the price to increase, excess supply meaning a surplus of goods in the market will mean the price will eventually fall. What you need to understand is the use of demand and supply to determine the price and quantity is a model. We use this demand and supply model to basicly understand the relationship between price and quantity and factors that can affect it. Hope this helps. (cheong@bgymail.gd.cn)

First answer by Equilibrium. Last edit by Equilibrium. Contributor trust: 111 [recommend contributor]. Question popularity: 24 [recommend question]