SUMMARY - PRICE DETERMINATION

DETERMINATION OF PRICE UNDER PERFECT COMPETITION

Equilibrium: It means a position of rest, there is no tendency to change.

Market equilibrium: It means equality between quantity demanded and quantity supplied of a commodity in
the market.
Equilibrium price: This is the price at which market demand of a commodity is exactly equal to the market
supply.
Market demand: It refers to the sum total demand for a commodity by all buyers in the market.
Market supply: It refers to supply of a commodity by all the firms in the market

The equilibrium price is that price where market demand is equal to market supply.
Equilibrium price is Rs. 3 OP.
Excess supply at oP1 is AB.
Chain Effects of Excess Supply – Competition among sellers – decrease in price -
expansion of demand and contraction of supply till the excess supply is fully
eliminated
Excess demand at Rs 1 is CD.
Chain Effects of Excess Demand – Competition among buyers – increase in price –
contraction of demand and expansion of supply - till the excess demand is fully
eliminated

SUPPLY OF
PRICE DEMAND FOR ICE
{Rs.}
ICE CREAM CREAM{DOZENS}
{DOZENS}
5 50 10 Excess Supply
4 40 20 Excess Supply
3 30 30 Equilibrium Price
2 20 40 Excess Demand
1 10 50 Excess Demand

4. Excess Demand: If at any price market demand is greater than market supply. it is said excess demand in the
market. Yd > Ys Here, Ys = Market supply Y d = Market Demand
5. Excess Supply: If at any price market supply is greater than market demand. it is said excess supply in the
market. Ys > Yd Here, Ys = Market supply Yd = Market Demand
6. Non-viable Industry : The industry for which demand curve and supply do not intersect each other at any
positive quantity is called non-viable industry.
7. Viable Industry: In case of viable industry supply and demand Curve must intersect at same point.
8. Effect of a Simultaneous Change in Demand and Supply on Equilibrium Price :
(a) Simultaneous increase in Demand and Supply
(1) When demand increases more than supply, both equilibrium price and quantity will increase.
(2) When demand and supply increases equally, equilibrium price remain constant and equilibrium quantity
increases.
(3) When supply increases more than demand, equilibrium price falls and quantity increases.
(b)Simultaneous decrease in Demand and Supply
(4)When demand and supply decrease in the same proportion, equilibrium price remains constant and quantity
decreases.
(5) When demand decreases more than supply, both the equilibrium Price and quantity will decrease.
(6) When demand decreases less than supply, the equilibrium Price increases and quantity will decrease.

(c)Demand decreases and Supply increases

7. When decrease in demand is equal to increase in supply equilibrium quantity remains but equilibrium price
decrease.
8. When Decrease in Demand greater than Increase in Supply the equilibrium quantity decreases and
equilibrium price decreases.
 9. When Decrease in Demand is less than Increase in Supply the new equilibrium quantity rises and equilibrium
price falls.

(d)Demand increases and Supply decreases

10. When Increase in demand is proportionate to th Decrease in supply the equilibrium quantity remains the
same and equilibrium price.
11. When Increase in Demand is greater than Decrease in Supply both the equilibrium quantity and prices
increases.
12. When the increase in Demand is greater than the Decrease in Supply equilibrium quantity decreases and
equilibrium price increases.

9. Effect of shifts in Demand on Equilibrium price

In case of increase in demand and supply remains constant – Both the
equilibrium quantity and price increases
In case of decrease in demand and supply remains constant – Both the
equilibrium quantity and price decreases.
10. Effect of shifts in Supply on Equilibrium Price

In case of increase in supply and demand remains constant – the

Equilibrium price decreases and the equilibrium quantity increases.

In case of decrease in supply and demand remains constant – the

Equilibrium price increases and the equilibrium quantity decreases.

11. Price ceiling: Price ceiling means maximum price of a commodity

that the seller can charge from the buyers. Often the government
fixes this price much below the equilibrium market price of a
commodity. so that, it becomes within the reach of the poorer
sections of the society.

12. Price Floor: It means the minimum price fixed by the

government for a commodity in the market .The govt fixes the
price for farm products . This regulates the income of the
farmers.