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Equilibrium of Demand and Supply:

 

Meaning and Definition:

 

The price of a commodity in the market is determined by the interaction of the forces of demand and supply. By "demand for a commodity" at a given price is meant:

 

"The total quantity of that commodity which buyers will take at different prices per unit of time".

 

While "supply of a commodity" at a given price refers to:

 

"That quantity of the commodity which sellers are willing to offer for sale at different prices per unit of time".

 

If we construct a list or table of the different amounts of the commodity which consumers purchase at different prices in the market, we get the market demand schedule. Similarly, supply schedule is a list or a table of different amounts of the commodity that are offered for sale in the market at different prices per unit of time.

 

In the market, there are large number of buyers and sellers. It is the desire of every buyer in the market to purchase a commodity at the lowest possible price while the sellers wish to sell it at the highest possible price.

 

When buyers compete among themselves for the purchase of particular commodity, the price of that commodity goes up and when there is competition amongst the sellers, the price comes down.

 

Equilibrium Price:

 

The price of a commodity tends to settle at a point where the quantity demanded is exactly equal to the quantity supplied. The price at which the buyers and sellers are willing to buy and sell an equal amount of commodity, is called the, equilibrium price. We illustrate the above proposition with the help of a schedule and a curve.

 

Schedule:

                                                

Quantity Supplied (Cooking Oil Kg) Per Week

Price (Dollars)

Quantity Demanded (Cooking Oil Kg) Per Week

800

600

500

450

19

18

17

16

100

250

400

450

350

100

15

14

500

700

 

If we study the above schedule carefully, we will find that when the price of cooking oil is $16 per kilogram, the total quantity demanded in a week is exactly equal to the total quantity supplied. So $16 is the equilibrium price for the period and the equilibrium amount, i.e. the quantity demanded and offered for sale is 450 kilograms of cooking oil is:

 

Equation:

 

 Qd = Qs

 

If the conditions assumed above remain the same, then there can be no equilibrium price other than $16.

 

Example:

 

For instance, if the price of cooking oil happens to rise to$18 per kilogram. At this price, the sellers are anxious to sell 600 kilograms of ghee but the buyers are willing to, buy only 250 kilograms. The sellers will compete with one another to dispose off this surplus stock. The competition among the sellers will result in lowering the price. When the price comes down to $16 (i.e., the equilibrium price), then the whole of the stock will be sold.

 

Conversely, if the price happens to fall to $14 per kilogram, the buyers would like to buy 700 kilograms of cooking oil, but the sellers are willing to sell only 100 kilograms. The buyers, in order to buy more cooking oil at a lower price will compete among themselves. This competition among the buyers will increase the price of ghee. Finally, the price will be reestablished at the equilibrium price which is $16.

 

Diagram/Figure:

  

The determination of the equilibrium price can be proved graphically.

 

 

In the figure (8.1) DD/ is the demand curve which, represents the different amount of .the commodity that are purchased in the market at different prices, SS/ is the supply cure which indicate, the amount of the commodity that is offered for sale at different prices per unit of time.

 

MN is the equilibrium price i.e., $16 and ON 450 kg. is the equilibrium amounts. If the price is below the equilibrium price ($16), there are upward pressure on price due to the resulting shortage of good. In case, the price is above the. equilibrium, there is a downward pressure on price caused by the resulting surplus of good. If is only at price MN, the buyers take of the market exactly what sellers place on the market.

Relevant Articles:

Equilibrium of Demand and Supply
Effects of Changes in Demand on Equilibrium Market

Effects of Shifts in Supply on Market Equilibrium

Effects of Shifts in Both Supply and Demand on Equilibrium Price and Quantity
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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