Determination of equilibrium price

In short run demand is more important than supply in determining the price, as supply is fixed but in the long run, supply is more important determinant of the price.

In a perfectly competitive market, it is the interaction between demand and supply that determines the price and the quantity. Let us understand this with the help of an example.

 Price (₹) Quantity Demanded Quantity supplied 1 10 4 2 8 6 2.5 7 7 3 6 8 4 4 10

Let us plot the above points in the form of a graph. In the above graph, we can notice that the equilibrium price is ₹ 2.5 and the equilibrium quantity is 7 units.

Now, why can’t we say that the equilibrium price is ₹ 2? This is because at ₹ 2, the quantity demanded is 6 units whereas, the quantity supplied is only 4 units. Thus, competition among sellers would push the prices up. On the other hand, if the price is ₹ 3, the quantity demanded would be 6 units, whereas, the quantity supplied would be 8 units. Thus, the prices would reduce because of competition prevailing in the market.

At ₹ 2.5, the quantity demanded and supplied would be equal (7 units). Hence, ₹ 2.5 is the equilibrium price and 7 units is the equilibrium quantity. The equilibrium price is the price at which no buyer is dissatisfied that he could not buy at that price and no seller is dissatisfied that he could not sell his goods at that price.  