Question

Explain the process of price determination of a commodity in a perfectly competitive market with the help of a diagram.

Hint:

In a perfectly competitive market, price is determined by the intersection of market supply and demand, and firms are price takers.

Answer 1

In a perfectly competitive market, the price of a commodity is determined by the interaction of supply and demand. The market price is set where the demand curve intersects the supply curve. At this price, the quantity demanded by consumers is equal to the quantity supplied by producers. Diagram Explanation: The demand curve is downward sloping, and the supply curve is upward sloping. The equilibrium price is where they intersect. Producers are price takers in perfect competition, meaning they accept the market price.