MARKET EQUILIBRIUM UNDER PERFECT COMPETITION AND EFFECTS OF SHIFT IN DEMAND AND SUPPLY
Concept of Market Equilibrium
It is defined as a state of the market when demand for a commodity is equals to its supply corresponding to a particular price. Thus, in a state of equilibrium market demand is equals to market supply of the commodity. There is neither excess demand nor excess supply. Price in the market in such situation is called equilibrium price. Quantity supplied or demanded is called equilibrium quantity.
Determination of Market Equilibrium
Market demand refers to the sum total of demand for a commodity by all the buyers in the market.
Market supply refers to the sum total of supply of a commodity by all the firms in the market.
Assumptions of Market Equilibrium under Perfect Competition
Price and quantity demanded are negatively related
Price and quantity supplied are positively related
Market forces operate freely without any government intervention.
Chain Effect of Shift in Demand
Increase in Demand
E: The point of initial equilibrium.
Increase in Demand: Demand curve shifts from D1D1 to D2D2. It causes excess demand.
It leads to rise in price from OP1 to OP2
Rise in price causes extension of supply & contraction of demand.
K: New Equilibrium Point
OP: New Equilibrium Price
OQ2: New Equilibrium Quantity.
Decrease in Demand
E: The point of initial equilibrium
Decrease in Demand: Demand curve shifts from D1D1 to D2D2. It causes excess supply
It leads to fall in price from OP1 to OP2
Fall in price causes extension of demand & contraction of supply