U.S. Japan Cars Grain for

A In this example, the equilibrium price and quantity is $6 and 81 pizzas.

b. If the price was above $6, there would be too much supply and not enough demand. The market for pizzas would move towards equilibrium, however. Pizza suppliers would have excess capacity. They would address this issue two ways. First, they would take steps to reduce capacity, for example a pizza maker could go out of business. Second, the pizza makers would lower their prices in order to stimulate demand and fill out the excess capacity. In this way, the price of pizza would be reduced through competition, and the supply of pizza would also be reduced as inefficient operators lose money and quit the business.

As the price of pizza comes down, more buyers will enter the market. This will result in an increase in demand for pizzas. The total result of this is that the demand, supply and price will all trend towards the equilibrium point.

c. If the price of pizzas in the market was below the equilibrium point, demand would be high. This would encourage more pizza makers to get into the market. The supply of pizzas would therefore increase. With a shortage of supply, pizza makers would have pricing power as well, so they would be able to increase prices, which would lower the demand. In this way, the demand would fall to meet the supply, and the price.

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