Question

Explain the determination of price of a commodity in a competitive market with the help of a diagram. What will happen if price is more than the equilibrium price?

Answer 1

Determination of equilibrium price in a competitive market can also be illustrated diagrammatically with the help of the market demand curve and the market supply curve.

The figure illustrates both the market demand and supply curves within a single diagram. The X-axis shows the quantity demanded and supplied, while the Y-axis represents the price level. The demand curve (DD) slopes downward, and the supply curve (SS) slopes upward. These two curves meet at a single point, known as the equilibrium point (E). At this point, the quantity demanded is equal to the quantity supplied. The price at equilibrium is marked as OP, and the corresponding quantity is OQ. If the market price rises above this equilibrium level, the quantity supplied exceeds the quantity demanded, leading to a surplus or excess supply in the market.

As sellers find it difficult to sell all their goods at the higher price, they begin to lower the price to attract buyers. This results in an increase in demand and a decrease in supply. Eventually, the price adjusts back to the equilibrium level, where demand once again equals supply.