Price Determination Under Perfect Competition ↓
In prefect competition, cost is determined past times the marketplace position forces of need too supply. All buyers too sellers are cost takers too non cost makers. Buyer represents need side inwards the market. Every rational buyer aims at maximising his satisfaction past times purchasing to a greater extent than at lower cost too lower at higher price. This is called need demeanour of buyer i.e. Law of Demand.
Seller represents provide side inwards the market. Every rational seller aims at maximizing his profits past times selling to a greater extent than at higher cost too lesser at lower price. This is called provide demeanour of seller i.e. Law of supply.
But at a mutual price, buyer is railroad train to need a item quantity of goods too seller is besides railroad train to provide just the same quantity of goods to buyer, such mutual cost is called 'Equilibrium Price' too such quantity is called 'Equilibrium Quantity'.
"Equilibrium Price is a cost which equates both need too supply".
Table - Sample Demand too Supply Schedules ↓
It is the cost at which full need is just equal to full supply. Graphically it is the betoken where DD bend too SS bend intersect each other.
Graph - Equilibrium Price Determination ↓
In the higher upward graphical diagram, the next points receive got been observed :-
- On X axis, quantity need too supplied per calendar week has been given too on Y axis, cost has been given.
- Buyers are purchasing to a greater extent than at lower cost too vice versa. This negative human relationship is shown past times downward sloping DD curve.
- Sellers are selling to a greater extent than at higher cost too vice versa. This positive human relationship is shown past times upward sloping SS curve.
- Rs. thirty is that cost at which need equates provide (300 units). So, Rs. thirty is an equilibrium cost too 300 units is an equilibrium quantity.
- Suppose, cost fails to Rs. 20/-, So this results into growth inwards need (as per Law of Demand) too decrease inwards provide (as per Law of Supply). Since DD > SS, i.e. because of depression supply, sellers volition last dominant too contest volition last amid buyers, this leads to rising inwards cost level. (i.e. from Rs. xx to Rs. 30) Again cost volition come upward dorsum at master degree i.e. equilibrium cost (Rs. 30).
- Suppose, provide exceeds need (DD < SS) straightaway buyers dice dominant too contest volition last amid sellers. This leads to downfall inwards price. (i.e. from Rs. forty to Rs.30). Again cost volition come upward dorsum to master level. i.e. equilibrium cost (Rs. 30).
- Such automatic adjustment past times need too provide forces volition continue unmarried cost inwards market.
