Why does market equilibrium cause stable prices?

Answer 1

Hi India! In short, market equilibrium creates stable prices because sellers of that good (price-setters) do not want to change the price because it would be bad for business.

Think about your general supply and demand graph: If the seller raises the price, then consumer's quantity demanded will go down and the quantity supplied will go up, creating a surplus - e.g. a seller will not sell all of his/her goods, losing him/her money. If they reduce the price, the opposite (a shortage) happens, meaning a seller will sell out with there still being some demand left. All in all, price at market equilibrium means quantity supplied equals quantity demanded, which sellers do not want to move from or they will lose money.