The document discusses the interaction between demand and supply in determining equilibrium price in a market. It defines equilibrium as a state where quantity demanded equals quantity supplied. The equilibrium price is the price where the amount consumers want to buy is equal to the amount producers want to sell. This occurs at the intersection of the demand and supply curves. In the example given, the equilibrium price is Rs. 4 per unit where demand and supply are both 20 units. Prices above or below this level will result in excess supply or demand that pushes the price back toward the equilibrium.
The document discusses the interaction between demand and supply in determining equilibrium price in a market. It defines equilibrium as a state where quantity demanded equals quantity supplied. The equilibrium price is the price where the amount consumers want to buy is equal to the amount producers want to sell. This occurs at the intersection of the demand and supply curves. In the example given, the equilibrium price is Rs. 4 per unit where demand and supply are both 20 units. Prices above or below this level will result in excess supply or demand that pushes the price back toward the equilibrium.
The document discusses the interaction between demand and supply in determining equilibrium price in a market. It defines equilibrium as a state where quantity demanded equals quantity supplied. The equilibrium price is the price where the amount consumers want to buy is equal to the amount producers want to sell. This occurs at the intersection of the demand and supply curves. In the example given, the equilibrium price is Rs. 4 per unit where demand and supply are both 20 units. Prices above or below this level will result in excess supply or demand that pushes the price back toward the equilibrium.
The document discusses the interaction between demand and supply in determining equilibrium price in a market. It defines equilibrium as a state where quantity demanded equals quantity supplied. The equilibrium price is the price where the amount consumers want to buy is equal to the amount producers want to sell. This occurs at the intersection of the demand and supply curves. In the example given, the equilibrium price is Rs. 4 per unit where demand and supply are both 20 units. Prices above or below this level will result in excess supply or demand that pushes the price back toward the equilibrium.
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Interaction between Demand and Supply
(Determination of Equilibrium Price: The Price Mechanism)
In general sense, the term equilibrium means the “state of rest”. Equilibrium refers to the market condition which, once achieved, tends to persist. It indicates the condition where two opposite forces are in balance. In the context of the market analysis, equilibrium refers to a state of market in which quantity demanded of a commodity in the per unit of time equals the quantity supplied of the commodity over the same time period. Market equilibrium requires that there be neither excess demand nor excess supply, and hence, the market will be cleared. The equality of demand and supply gives an equilibrium price. In other words, at equilibrium price demand and supply are in equilibrium, i.e.
Market Demand = Market Supply
The equilibrium price is the price at which the consumers are willing to purchase the same quantity of a commodity which producers are willing to sell. The amount that is bought and sold at equilibrium price is called the ‘equilibrium quantity’. The process of equilibrium can be shown with the help of table.
The above table shows that Rs.4 is the equilibrium price because, at this price, quantity demanded is equal to quantity supplied, that is, 20 units. Thus equilibrium price is determined as Rs. 4 per units of commodity. It is the only price at which the maximum number of buyers and sellers are satisfied. So long as market demand and supply remain unchanged, the price will neither tend to rise nor fall below this equilibrium price. Geometrically, equilibrium occurs at the intersection of the commodity’s market demand curve and market supply curve. This can be explained with the help of following fig.; Y D Excess Supply S
6 M N Price
4 E Market Equilibrium
A B 2
S Excess Demand D
0 10 20 30 X Quantity demand/supply
The above figure shows the market equilibrium in which DD is the demand curve and SS is the supply curve. Both the curves intersect each other at point E where equilibrium price is Rs. 4 and quantity demanded and supplied are equal to 20 units. Thus Rs 4 will be equilibrium price and 20 units will be equilibrium quantity.
Suppose the actual price of a commodity prevailing at a particular time in the market is Rs. 2 per unit. At this price, demand for commodity is 30 units, whereas supply is 10 units, that is, there is excess demand of 20 (= 30 – 10) units. This will create competition among buyers to buy commodities which are in short supply and push the price up till it reaches the equilibrium price of Rs. 4 per units, where demand becomes equal to supply (= 20 units).
Suppose the actual price of a commodity prevailing at a particular time in the market is Rs. 6 per unit. At this price, demand for commodity is 10 units, whereas supply is 30 units, that is, there is excess supply of 20 units. This will create competition among sellers to sell their commodities which are in excess supply and push down the price till it reaches the equilibrium price of Rs. 4 per units, where demand becomes equal to supply (= 20 units). Thus, in the above figure point ‘E’ is the equilibrium point at which market demand (D) is equal to the market supply (S). This indicates demand and supply are holding each other in balance and the equilibrium price has been reached. As per above illustration, the equilibrium price is Rs. 4 per units and the equilibrium quantity(Q) is 20 units.
