Question

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

Answer 1

When the price drops to OP₂, the quantity demanded increases from OQ to P₂L, as more consumers who couldn’t afford the product earlier are now willing to buy it at the lower price. At the same time, the quantity supplied decreases from OQ to P₂K, since sellers are less willing to supply at a lower price. This creates a situation of excess demand, equal to the gap KL. Because of this shortage, many buyers are unable to get the product at the lower price. In an effort to purchase it, they are willing to pay a higher price, which causes the price to rise. As the price increases, demand contracts and supply expands. This process continues until the price reaches the equilibrium level (OP), where quantity demanded equals quantity supplied.

In general, when the price is below equilibrium, excess demand arises in the market. The shortage of goods leads buyers to compete, driving the price up. As prices rise, demand falls and supply increases, restoring the market to equilibrium.