PRICE DETERMINATION UNDER PERFECT

COMPETITON
EQUILIBRIUM PRICE OR MARKET PRICE : It is the price at which the market
demand and market supply of a commodity are equal to each other. At this price
there is no incentive to price to change. It is the price when there is no excess
demand and excess supply.

MARKET DEMAND =MARKET SUPPLY.

In a very short period ,demand is more active in determining price, as supply is

fixed. In the long run ,supply plays a more active role in determining price.

PRICE DETERMINATION : Equilibrium price or market price will be determined

where quantity demanded is equal to quantity supplied in the market. This price has
a tendency to persist . If, at a price, the market demand is not equal to market
supply ,there will be either excess demand or excess supply .The price will have the
tendency to change until it settles once again at a point where market demand
equals market supply.

It can be shown by schedule and curve.

PRICE DEMAND SUPPLY SITUATIO

8 1
7 2
6 3
5 4
4 5
N
5 EXCESS
SUPPLY
4 EXCESS
SUPPLY
3 MARKET
EQUIL
2 EXCESS D
1 EXCESS D

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The equilibrium price is fixed at Rs 6 where the quantity demanded and quantity
supplied are equal that is 3 units.

In the diagram-

• On X-axis , quantity demanded and supplied are shown.

• On Y-axis, price of the commodity is shown.

• DD is the market demand curve ,showing total quantities of the commodity

demanded by all the consumers in the market at given price and time.

It is downward sloping showing negative slope.

• SS- It is the market supply curve , showing total quantities of the

commodity supplied by all sellers in the market .It is upward sloping
showing positive slope .

• E- is the equilibrium point where DD and SS curve intersect each other

Market demand is equal to market supply.

fig……

• OQ – is the equilibrium quantity demanded and supplied at

equilibrium price.

• OP- is the equilibrium price where D=S .This price has a tendency to
persist . If there is any increase or decrease in price , there will be

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 automatic adjustment between demand and supply . The price will
change and settle at a point where demand = supply.

CASE 1: EXCESS SUPPLY (S > D)

Suppose there is increase in price from OP to OP1 . Supply will be greater

than demand .This situation is called excess supply.

S>D Excess supply at OP1 price.

This situation will lead to fall in price . Ultimately, demand will increase and
quantity supplied will decrease and become equal at OP price .

CASE 2: EXCESS DEMAND ( D>S )

Suppose there is fall in price from OP to OP0 . Demand will be greater than
supply . The situation is called excess demand.

D>S Excess demand at OP0.

This situation will lead to rise in price , ultimately demand will reduce and
supply will increase and become equal to OP price .It is the price where there
is zero excess supply and zero excess demand.

EFFECTS OF CHANGES IN DEMAND AND SUPPLY ON EQUILIBRIUM

PRICE

Equilibrium price is determined at the point where quantity demanded is

equal to quantity supplied . Equilibrium price and output will change only if
there is any change in either demand or supply or both .

There can be a number of situations :

Situation 1: Increase in demand and supply constant

Causes for increase in demand : If asked

The demand curve will shift rightward .

On X-axis – quantity demanded and supplied are shown.

On Y-axis –price is shown

DD is the original demand curve

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 SS is the original supply curve

E- is the equilibrium point where demand= supply

OQ- is the equilibrium quantity demanded and supplied

OP- is the equilibrium price.

New situation:

ΔD1 is the new and increased demand curve

SS is the original supply curve

- equilibrium point will shift from E to E1

- equilibrium quantity will increase from OQ to OQ1

- equilibrium price will increase from OP to OP1

CONCLUSION: Both buyers and sellers are ready to buy and sell more
quantity at higher price

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