Advertisements
Advertisements
Questions
How is equilibrium price determined? Show it diagrammatically.
How do the forces of demand and supply determine the equilibrium price?
Advertisements
Solution
The equilibrium price of a commodity is determined by the interaction of demand and supply in the market. It is the price at which quantity demanded equals quantity supplied. At this point, the market is said to be in equilibrium, and there is no tendency for the price to change.
- Buyers are willing to buy exactly the amount that sellers are willing to sell.
- There is no excess demand or excess supply.
- We have sold all the stock, leaving no unsold inventory.
This equilibrium ensures that the market clears. If the price is above equilibrium, there is excess supply, and if the price is below equilibrium, there is excess demand. Both situations push the price toward equilibrium again.
For example, if at ₹ 50 the quantity demanded and supplied of wheat are both 1,000 kg, then ₹ 50 is the equilibrium price.
