Definition of Equilibrium:
market, there are two sets of forces tending in the opposite direction. On the
one side, there are large number of buyers who compete with one another for the
purchase of commodities at lower prices. Competition amongst the buyers tends to
raise the price. On the other side, there are large number of sellers who
compete with one another for the, sale of commodities at higher prices.
Competition amongst the sellers tends to lower the price. When the pressure of
these two forces is equal in the opposite direction, i.e., when the quantity
offered for sale is just equal the quantity demanded at a particular price, the
market is said to be in equilibrium.
Definition of Market Price:
at which the amounts demanded and supplied is exactly equal, is. called the
market equilibrium or the market price is not something fixed. It is subject to
fluctuations with the increase or decrease in demand or with the increase or
decrease in supply. Market price or the very short run price is the price which
tends to prevail in the market at any particular, time. It may change from hour
to hour or from day to day. It is, in fact, the result of temporary equilibrium,
between the demand for and the supply of a commodity at a certain time, e.g., if
the demand for a commodity increases per unit
of time, supply remaining the same, prices go up. We can, thus, call the market
price as the changing equilibrium.
period is very short, say an hour, or, a few hours, the supply of the
commodities if demanded more cannot be increased with the further production of
goody. The supply can only be brought from the stock already available for sale.
In a very short period, the cost of production has a very negligible influence
on the market price. If the commodities are perishable, like fish, fruits, etc.,
and there is no arrangement available for placing them in cold storages, then
the cost of production has practically no influence on price and there is also
no reserve-price on the part of the sellers.
commodities can be kept for a longer period, then it has an indirect influence
on market price. If price falls lower than the reserve price, the commodities
will not be brought for sale but will be kept in store hoping to dispose them
off when their prices cover the cost of production. The analysis of the market
equilibrium or the market price stated above can be discussed in more detail.
Market Price of Perishable Commodities:
In a case
of a commodity which, is perishable, the cost of production has practically no
influence on the market price. The whole of the stock has to be disposed off at
the prevailing price. Let us suppose a perishable commodity like fish is brought
for sale in the market to the amount of 50 kilograms. The total quantity of fish
demanded by all individuals in the market at various prices per day is as
$) Per Kg.
Supplied Per Day
||Quantity in Kg.
Demanded Per Day
schedule given above, the reader can understand that if the seller wishes to
sell the whole of the stock, it can be sold at $10 per kilogram. As in a perfect
market, there can be only one price for a particular commodity, so the buyers
who are willing to buy at higher price, enjoy consumer's surplus. The price
determination in the market period can be illustrated with the help of a
diagram. The equilibrium market price is where demand and supply curves
graph (15.13) quantity is measured along OX axis and price along OY axis. As the
supply of a perishable commodity is fixed and cannot be held back, therefore,
the market period supply curve (MSC). SS will be a vertical straight line. The
market demand curve DD' intersects the market supply curve at point M. MS ($10)
is the market price at which the total quantity of fish is sold in the market.
suppose that demand for fish rises due to strike on the part of the meat
sellers, the new demand curve D1D1 intersects the market
supply curve at point LLS which is equal to $50 will be new market price. If the
demand falls, the new demand curve D2D2 cuts the supply
curve at point R. $30 which is equal to $5 is the new equilibrium price.
Market Price of Non-Perishable Commodities:
commodities are not perishable, the stock can be kept in store for certain
period. If prices rise and the sellers think it profitable to sell, then the
whole of the stock can be brought in the market for sale. If prices fall and the
sellers do not think it advantageous to sell, then a part or whole of the stock
can be withheld with a view to sell it at some future date when the prices rise.
After haggling and bargaining, a price is established which just clears the
market. At this price, the total amount demanded is exactly equal to the total
amount supplied. This can be proved with the help of a schedule and a diagram.
Quantity in Quintals Demanded (Per Week)
($) Per Quintals
in Quintals Supplied (Per Week)
||Pressure on Price
schedule given above, when the price of a commodity is $15 per quintal, the
total, quantity demanded per week is just equal to the total quantity supplied,
i.e., 100 quintals.
also be illustrated with the help of a diagram. In the Fig. (15.14) SSN is the
supply curve of non-perishable commodity in the very short period. OZ is the
quantity of goods which can be brought into the market for sale. DD/
is the market demand curve which intersects the market. supply curve at point P.
PM which is equal to $15 is the equilibrium price or the market price point P.
PM which is equal to $15 is the equilibrium price or the market price and OM the
equilibrium amount If the demand rises, the new market demand curve intersects
the supply curve at point R. RZ then will be the, market price. NS position of
the supply curve is a vertical line showing that even if
price rises, the quantity cannot be increased. However, the price will go up
with the increase in demand.
demand falls, the new demand curve D2D2 cuts. The supply
curve at point T. TH then is the market price. It shows that at lower price,
less commodity is offered for sale. In this case, it is OH quantity only which
is brought into the market for sale at TH price.