Forms of Market and Price Determination under Perfect Competition
Perfect Competition
The model assumes many buyers and sellers, homogeneous products, free entry and exit and firms acting as price takers. These assumptions are analytical conditions, not a claim that every real market perfectly satisfies them.
Market Equilibrium
Equilibrium occurs where quantity demanded equals quantity supplied. At a price below equilibrium, there is excess demand or shortage; at a price above equilibrium, there is excess supply or surplus.
Demand and Supply Shifts
An increase in demand, with supply unchanged, tends to raise equilibrium price and quantity. An increase in supply, with demand unchanged, tends to lower equilibrium price and raise equilibrium quantity.
Worked Table
| Price | Demand | Supply |
|---|---|---|
| 10 | 100 | 40 |
| 20 | 80 | 60 |
| 30 | 60 | 60 |
| 40 | 40 | 80 |
At price ₹30, quantity demanded equals quantity supplied at 60 units. Therefore ₹30 is the equilibrium price and 60 units the equilibrium quantity in this example.
MCQs
- At a price below equilibrium, the market has:
Answer: Excess demand.
Explanation: Buyers want to purchase more than sellers are willing to supply at that price, creating a shortage. - If supply increases while demand is unchanged:
Answer: Equilibrium price tends to fall and equilibrium quantity tends to rise.
Explanation: A rightward supply shift makes more output available at each price. The new intersection with demand generally occurs at a lower price and higher quantity.
Graph Practice
Draw demand and supply curves, mark equilibrium, then shift supply rightward. Label the original and new equilibrium price and quantity.