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February 23, 2018

Equilibrium of Demand and Supply - Market Price

February 23, 2018


Demand and supply are the fundamental concepts of economics and they are the backbone of market economy. The price of a commodity is determined through the interaction of demand and supply in the market.  In this article, first we will understand the meaning of demand, quantity demanded, supply, quantity supplied, and price. Then we will come to the equilibrium of demand and supply.  

Demand: Demand refers to the desire of a person having purchasing power and willingness to purchase. It represents overall demand for a good or service.

Quantity demanded: Quantity demanded is the specific quantity of a good that consumers are willing to buy at a given price.

Supply: Supply is the total amount of a specific good or service which is available to consumers. In other words, it is the total amount of a specific good that suppliers are willing to provide to the marketplace.

Quantity supplied: Quantity supplied is the specific quantity of a good that suppliers are willing to offer to the marketplace.

Price: The amount of money to pay for goods or services. 

Equilibrium of Demand and Supply - Market Price

Demand and supply act in the opposite direction regarding to price. When the price of a good falls, its quantity demanded increases but its quantity supplied decreases. On the other hand, when the price of a good rises, its quantity demanded decreases but its quantity supplied increases.  So, at the price where quantity demanded equals to quantity supplied is said to be equilibrium price. In other words, at the point where demand and supply curves intersect each other is called equilibrium or market price.   At this point, the quantity of goods being supplied is equal to the quantity of being demanded. Thus, everyone is satisfied with the current economic condition. In this condition, the suppliers are willing to offer goods that they have produced and the consumers are buying goods that they have demanded.   

The equilibrium price can further be illustrated with the help a schedule and a diagram. 

Schedule of price equilibrium

The above table shows at the price of Rs. 70 the quantity demanded and the quantity supplied are equal. Thus, Rs. 70 is the price equilibrium, because at this price buyers are willing to buy 16000 Kgs of rice and the sellers are willing to sell 16000 Kgs of rice.

Now we will illustrate the equilibrium price with the help of a diagram.

Equilibrium or market rice

In the above figure (2.1), SS is the supply curve and DD is the demand curve. it can be seen the demand and supply curves are intersecting each other at point E at the price of Rs. 70. So, Rs. 70 is the equilibrium price at which both buyers and sellers are satisfied. 
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