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.
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