Explain how an equilibrium price for a product is established in

a market and how it may change.

Market equilibrium is the situation, where at a certain price level,
the quantity supplied and the quantity demanded of a particular
commodity are equal. Thus, the market can clear, with no excess supply
or demand, and there is no tendency to change in either price or quantity.
Diagrammatically, market equilibrium occurs where the demand and
supply curves intersect, at the point where the quantity demanded is
exactly equal to the quantity demanded.
As for disequilibrium, it is the situation where the quantity supplied
and the quantity demanded of goods are not equal at a certain price level.
Consider the case where there is an excess demand, where the current
price is below that of equilibrium, as shown in Figure 1 and Figure 2:

Figure 1

Figure 1 reveals that at price (P1), the equilibrium is achieved at

point A for coffee. Say the price of tea rises. This causes the consumers
demand for the goods substitutes like coffee to rise. The demand curve
will shift to the right (D1 to D2). At price (P1), the quantity demanded (Q2)
exceeds the quantity supplied (Q1) that leads to a shortage. Competition
among buyers for the limited quantity of coffee available means that
consumers will start bidding up the price. The rise in the price results in an
extension in supply and a contraction in demand (movement along the
curves towards the equilibrium point). This will continue to occur as long
as there is excess demand. Eventually, we will reach the intersection of
the supply and demand curves at point C, where at price (P2), the

quantity supplied (Q3) exactly equals the quantity demanded (Q3) by

consumers.

Figure 2

Figure 2 reveals that at price (P1) for margarine, the equilibrium is

achieved at point (Q1, P1). Let us say that the cost of production for
margarine rises. The producers will supply other goods to make larger
profit thus they will reduce the supply of margarine. The supply curve will
shift to the left (S1 to S2). At price (P1), the quantity demanded (Q1)
exceeds the quantity supplied (Q3) that leads to shortage. Competition
among buyers for the limited quantity of goods available means that
consumers will start bidding up the price. The rise in the price results in an
extension in supply and a contraction in demand (movement along the
curves towards the equilibrium point). This will continue to occur as long
as there is excess demand. Eventually, we will reach the intersection of
the supply and demand curves at point (P2, Q2), where at price (P2), the
quantity supplied (Q2) exactly equals the quantity demanded (Q2) by
consumers.