Economic Equilibrium: The Sweet Relation Between Milk and Ice Cream
What happens when the price of milk decreases in the production of ice cream?
A. The equilibrium price of ice cream increases and the equilibrium quantity of ice cream increases.
B. The equilibrium price of ice cream increases and the equilibrium quantity of ice cream decreases.
C. The equilibrium price of ice cream decreases and the equilibrium quantity of ice cream increases.
D. The equilibrium price of ice cream decreases and the equilibrium quantity of ice cream decreases.
Answer:
Option C is correct.
In economics, economic equilibrium is a state of affairs in which financial forces, such as supply and demand, are balanced. When the price of milk decreases in the production of ice cream, the equilibrium price of ice cream decreases and the equilibrium quantity of ice cream increases.
Market equilibrium is a condition where the market price is established through competition, ensuring that the quantity of ice cream demanded by buyers is equal to the quantity of ice cream produced by sellers. This price is known as the competitive price or market clearing price and tends not to change unless there are changes in demand or supply.
Furthermore, the concept of equilibrium in economics extends to imperfectly competitive markets, taking the form of a Nash equilibrium.