Question

Describe the determination of equilibrium price and quantity under perfect competition.

Hint:

Equilibrium Condition: \[ Q_d = Q_s \] Intersection of demand and supply curves gives both equilibrium price and quantity.

Answer 1

Concept: Under perfect competition, no individual buyer or seller can influence the market price. The equilibrium in the market is determined by the interaction of:

• Market demand (from consumers)
• Market supply (from producers)

Equilibrium Meaning: Market equilibrium refers to a situation where: \[ \text{Quantity Demanded (Q}_d) = \text{Quantity Supplied (Q}_s) \] At this point:

• There is no shortage.
• There is no surplus.
• Price remains stable.

Determination of Equilibrium Price:

• The equilibrium price is determined at the point where the demand curve intersects the supply curve.
• At this price, buyers are willing to buy exactly the quantity that sellers are willing to sell.

Determination of Equilibrium Quantity:

• The quantity corresponding to the equilibrium price is called equilibrium quantity.
• It is the level of output where market clears completely.

Adjustment Mechanism: 1. Excess Demand (Shortage):

• When price is below equilibrium: \[ Q_d > Q_s \]
• Competition among buyers pushes price upward.

2. Excess Supply (Surplus):

• When price is above equilibrium: \[ Q_s > Q_d \]
• Sellers reduce price to clear unsold stock.

Graphical Representation:

• Demand curve slopes downward.
• Supply curve slopes upward.
• Their intersection gives equilibrium price and quantity.

Conclusion: Thus, under perfect competition, equilibrium price and quantity are determined by the interaction of market demand and supply, where quantity demanded equals quantity supplied, ensuring market stability.