Explain how the price mechanism brings about the equilibrium price and also how and why the government would intervene in the market place.

Market equilibrium is a situation where at a certain price level, the quantity supplied by producer and the quantity demanded by consumers are equal. It is a situation where there is no tendency for change in either price of product or quantity supplied and demanded. This situation is brought about by forces of the price mechanism, the interplay of demand and supply market forces. The situation of market equilibrium is represented by the above figure. …

…conclusion, the price mechanism is effective at resolving basic market issues like how much to produce at a price level, and determining the equilibrium. However, the price mechanism does not take into account externalities, so its possible that unsatisfactory outcomes, or market failure can occur. In these cases the government may intervene to solve the problem through methods like implementing price ceilings and floors, although it may not maximise benefits to both producers and consumers.