If a firm charges a price below the equilibrium price, what will be the result?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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If a firm charges a price that is below the equilibrium price for its product, shortages of the good in question will arise.

In order to understand this, we must understand the laws of supply and demand.  According to the law of supply, suppliers will produce less of a good or service if its price drops.  Therefore, when the firm charges a low price, it will likely also stop producing as much of the product.  Meanwhile, the law of demand tells us that consumers will demand more of a product as its price drops.  Therefore, when the firm lowers its prices below equilibrium, more of the product will be demanded.  Thus, we have a situation in which the supplier is producing less of a product at the same time that consumers want more of that product.  This will cause a shortage of the product to arise.

Thus, charging a price below equilibrium will result in shortages of a good.

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