Page 2 - Home Assignment-Price determination
P. 2
Case-1: - If the price happens to be .i.e. above the equilibrium price then,
1
It will create an excess supply situation in the market by ‘AB’.
In order to overcome the excess supply situation, the price will
fall.
It will lead to an expansion in demand from A to E, and
contraction in Supply from B to E.
Finally, the equilibrium price OP and quantity OQ is determined at
the point E, where market demand = market supply.
Case-2: - If the price happens to be .i.e. below the equilibrium price then,
0
It will create an excess demand situation in the market by ‘LM’.
In order to overcome the excess demand situation, the price will
rise.
It will lead to an expansion in supply from L to E, and contraction
in Demand from M to E.
Finally, the equilibrium price OP and quantity OQ is determined at
the point E, where market demand = market supply.
Equilibrium price: - It refers to the price at which the quantity demanded of a
commodity is equal to the quantity supplied.
Equilibrium Quantity: - It refers to the quantity at which the quantity
demanded of the commodity is equal to the quantity supplied.
Equilibrium price: - The price at which quantity demanded = quantity supplied
and there is neither any stock nor deficit in the market.
Excess supply: - It refers to a situation when the quantity supplied is more than
the quantity demanded at the prevailing market price and usually it takes place
above the equilibrium price.
Excess demand: -It refers to a situation when the quantity demanded is more
than the quantity supplied at the prevailing market price and usually it takes
place below the equilibrium price.
Viable industry: - It refers to an industry in which the supply curve and demand
curve intersect each other in the positive axis i.e. the first quadrant of a two-
dimensional industry.
Non-viable industry: - It refers to an industry in which the supply curve and
demand curve never intersect each other in the positive axis.
