Final answer:
The equilibrium price is where the quantity demanded equals quantity supplied. In the provided scenarios, equilibrium is naturally found at a market price of $4 for coffee and 150 rials for wheat flour, but a price ceiling on a drug can disrupt this balance, reducing quantity supplied.
Step-by-step explanation:
The market price that will prevail is known as the equilibrium price. This is the price at which the quantity demanded equals the quantity supplied. For example, in the scenario provided, the equilibrium price for coffee is $4, at which consumers are willing to purchase 200 million pounds, and this is the same quantity that producers are willing to supply. In a market, prices can fluctuate based on supply and demand dynamics. A price surge may encourage producers to supply more, but if prices rise too high, competition may increase and prices could subsequently fall as new sellers enter the market with lower prices.
While a change to 100 rials may initially cause a shortage, sellers will likely raise their prices due to high demand until equilibrium is restored at 150 rials. At this point, any attempt to increase prices further would create a surplus and compel sellers to reduce prices to eliminate it. An imposed price ceiling can disrupt this equilibrium, as demonstrated in the situation where the government sets a price of $400 for a back pain drug, lowering the quantity supplied from the equilibrium of 20,000 to just 15,000. Ultimately, markets have a natural tendency to move towards equilibrium through the self-interested actions of buyers and sellers, but government interventions like price ceilings can impact this process.