Price Determination and Simple Applications
As we are already done with starting perfect competition form of market, give reasons how and why this market reaches equilibrium.
Under this market equilibrium is established at a point main market demand and market supply intersect each other.
EXCESS DEMAND
Excess demand refers to a situation when the demand for commodity exchange in relations of supply of commodity at a particular price.
EXCESS SUPPLY
Excess supply refers to the situation when the quantity supply of a commodity exchange quantity demanded at a particular market price.
VIABLE INDUSTRY
The viable industry is an industry, whose demand and supply curve intersect each other in a positive axis.
NON-VIABLE INDUSTRY
The non-viable industry refers to an industry where the demand and supply curve does not intersect in a positive axis.
EFFECT OF CHANGE IN DEMAND AND SUPPLY ON MARKET EQUILIBRIUM:
When demand or supply for any commodity changes, the equilibrium quantity and price also bound to change. the following cases are possible :
CHANGE IN DEMAND
Change in demand can be an increase in demand or decrease in demand and this leads to a change in equilibrium quantity and equilibrium price.
Increase in demand- An increase in demand will lead to the rightward shift in demand curve from DD to D1D1.
When demand increases from DD to D1D1 one new equilibrium is achieved at e1 and quantity increases from OQ to OQ1 and equilibrium prices Rises from OP to OP1.
Decrease in demand- A decrease in demand will lead to a leftward shift in demand curve from DD to D1D1.
When quantity demand Falls, a new equilibrium is established at E1 and equilibrium quantity falls from OQ to Q1 and equilibrium price also Falls from OP to OP1.
CHANGE IN SUPPLY
A change in supply can be either increase in supply or decrease in supply which affects equilibrium price and quantity.
Increase in supply- An increase in supply will lead to a rightward shift in supply curve from s s to S1 S1.
When supply increases, supply curve shifts right word from s s to S1 S1 and a new equilibrium is established at point E1 where equilibrium quantity increases from OQ to OQ1 and equilibrium price Falls from OP to OP1.
Decrease in supply- a decrease in supply will lead to a leftward shift in supply curve from DD to D1D1.
When the supply of a commodity Falls, supply curve shifts left words from SS TO S1S1 and a new equilibrium is established at point E1 and quantity demanded falls from OQ to oQ1 and price Rises from OP to OP1.
