Interaction Between Demand & Supply (Equilibrium Position)
The quantity demanded and supplied are two market forces. The equality between them is called equilibrium condition of the market which determines the equilibrium price and quantity of a commodity in a market i.e. the equilibrium price and quantity are determined by the interaction between two market forces demand and supply. Thus, the market is said to be in equilibrium condition when quantity demanded and quantity supplied of a commodity are equal. Otherwise it is said to be in disequilibrium condition. In disequilibrium condition, there is either excess demand or excess supply condition. It can be explained with the help of following table and figure:
The above table shows that at Price Rs. 5, the quantity demanded 8s greater than the quantity supplied (i.e. 30>10). This is the case of excess demand condition. This gives rise to increase in price. At the price Rs. 15, the quantity supplied is greater than the quantity demanded which is the case of excess supply i.e. 30<10. This leads to the fall in price of the commodity. But at price Rs. 10, quantity demanded and quantity supplied are equal as 20 units. This is the case of market equilibrium in which there is neither increase nor decrease in price of the commodity i.e. at the market equilibrium condition, price of the commodity is stable. This can be explained with the help of following figure:
In the above figure, DD and SS represents Demand and Supply Curve respectively which are interesected with each other at point E which is equilibrium point. At point E demand for a commodity is equal to its supply as 20 units and the price Rs. 10. If the price is Rs. 5, demand is 10 units i.e. D>S, it is the case of excess demand. In such case, price rises from Rs. 5 to Rs. 10. Similarly, at the price Rs. 15, the demand is 10 units and supply is 30 units, it is the caseof excess supply. This process of adjustment will continue as long as the demand is equal to supply. When the price reaches to Rs. 10, the market will be in equilibrium condition.
End of Chapter 2
