Interaction between Demand and Supply (Market Equilibrium Situation)

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Interaction between Demand and Supply (Market equilibrium)

In a competitive market, the interaction of the forces of demand and supply determine the market price of any commodity.

Equilibrium is a condition where there is equalization of demand and supply in the market.

According to Alfred Marshall, “As both blades if a scissor is important to cut a piece of cloth, so is demand and supply essential for the determination of price.”

It means, in a perfect competitive market, price of a commodity is determined at that point where quantity demanded is equal to quantity supplied.

Interaction of demand and supply can be explained by the help of table.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

This table shows the direct relationship between price and quantity supplies and opposite relation between price and quantity demanded.

In the above table, equilibrium price is Rs 15 and equilibrium quantity is 300 kg at Rs 5 and Rs 10, there is excess demand over supply because of low price of the commodity.

As a result, there is pressure on price to rise so that the price increases to Rs 15 where demand us equal to supply.

On the other hand at Rs 20 and Rs 25 there is excess supply over demand because of higher price of the commodity.

As a result, there is pressure on price to fall.

Therefore, price decreases and comes to Rs 15 where quantity demanded is equal to quantity supplied.

In the given figure, x-axis represents quantity and y-axis represents price of the commodity.

DD is demand curve and SS is supply curve.

The marker is in equitation at point E where quantity demand is equal to quantity supply.

Thus equilibrium price and output are determined at Rs 15 and 300 kg respectively.

There will be excess supply over the price Rs 15 and pressure to fall unless the quantity demanded becomes equal to quantity supplied.

Likewise, there will be excess demand over supply in blow Rs 15.

So, there is pressure on price to rise unless and until the quantity demanded becomes equal to quantity supplied.

Thus in a perfect competitive market price is determined through the market forces, demand and supply of the commodity.

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