Demand and supply are the fundamental
concepts of economics and they are the backbone of market economy. The price of
a commodity is determined through the interaction of demand and supply in the
market. In this article, first we will
understand the meaning of demand, quantity demanded, supply, quantity supplied,
and price. Then we will come to the equilibrium of demand and supply.
Demand: Demand refers to the desire of a person having purchasing
power and willingness to purchase. It represents overall demand for a good or
service.
Quantity demanded: Quantity demanded is the specific quantity of a
good that consumers are willing to buy at a given price.
Supply: Supply is the total amount of a specific good or service which
is available to consumers. In other words, it is the total amount of a specific
good that suppliers are willing to provide to the marketplace.
Quantity supplied: Quantity supplied is the specific quantity of a
good that suppliers are willing to offer to the marketplace.
Price: The amount of money to pay for goods or services.
Equilibrium of Demand and Supply - Market Price
Demand and supply act in the
opposite direction regarding to price. When the price of a good falls, its
quantity demanded increases but its quantity supplied decreases. On the other
hand, when the price of a good rises, its quantity demanded decreases but its
quantity supplied increases. So, at the price
where quantity demanded equals to quantity supplied is said to be equilibrium
price. In other words, at the point where demand and supply curves intersect
each other is called equilibrium or market price. At this
point, the quantity of goods being supplied is equal to the quantity of being
demanded. Thus, everyone is satisfied with the current economic condition. In
this condition, the suppliers are willing to offer goods that they have
produced and the consumers are buying goods that they have demanded.
The equilibrium price can
further be illustrated with the help a schedule and a diagram.
The above table shows at the
price of Rs. 70 the quantity demanded and the quantity supplied are equal. Thus,
Rs. 70 is the price equilibrium, because at this price buyers are willing to
buy 16000 Kgs of rice and the sellers are willing to sell 16000 Kgs of rice.
Now we will illustrate the
equilibrium price with the help of a diagram.
In the above figure (2.1), SS is the supply curve and DD is the demand curve. it can be seen
the demand and supply curves are intersecting each other at point E at the price of Rs. 70. So, Rs. 70 is
the equilibrium price at which both buyers and sellers are satisfied.
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