Explain how the equilibrium price and quantity in a market is determined and how governments can change the equilibrium outcome by influencing supply and demand

In a market economy the main goal aimed to be achieved in the market is the Equilibrium level. Equilibrium price and quantity is the one and only price and quantity where there is no tendency to change as long as the supply and demand curve stays in their current position (ceteris paribus). Basically this means it is the price and quantity, the buyers and sellers both agree on without considering the other variables (ceteris paribus). Hence in this situation there is no excess supply or a situation of excess demand. Therefore the prices will move until it obtains the equilibrium level.
Using a diagram the Equilibrium level is essentially the point of intersection of the supply and demand curve. This is the point where the quantity demanded is exactly equal to the quantity supplied. Shown in the diagram below Figure 1.1 it illustrates to us the equilibrium. It shows that at Price p* and Quantity q* the buyers demand exactly the amount the seller produce.

[pic]Figure 1.1

The equilibrium price and quantity in a market is basically determined by the fundamentals of supply and demand. Demand is the quantity of a particular good or service that consumers are willing and able to purchase at various price levels at a given point in time. There are factors that influence this market demand such as the price of the good itself, the price of the substitutes, changes in taste and preferences and the level of income. Only a change of price can influence the movements along the existing demand curve by way of expansions and contractions in demand. Any other factors that influence the market demand will lead to a shift of the curve, these shifts are referred to as either increase or decrease in demand. As shown in Figure 1.2 where D1 to D2 is the increase in demand causing an expansion of supply. The law of...