A perfectly competitive market comprises buyers and sellers who are driven by their motivations. The consumers’ focus is to maximise their corresponding tendency, and that of the enterprises is to maximise their respective profits. Both the customers’ and enterprises’ objectives are adaptable in the equilibrium.
Equilibrium is defined as a situation where the plans of all the customers and enterprises in the marketplace match and all products are sold. In equilibrium, the average quantity that all the enterprises wish to sell equals the amount that all the customers in the market wish to purchase.
In other words, the market supply equals the market demand. The cost price at which equilibrium is reached is known as the equilibrium price, and the quantity purchased and sold at this cost price is known as the equilibrium quantity.
If at a cost price, the market supply is greater than the market demand, we say that there is an excess supply in the market at that cost price, and if the market demand exceeds the market supply at a cost price, we say that an excess demand exists in the marketplace at that cost price.
Hence, equilibrium in a perfectly competitive market can be defined as a ‘zero excess demand and zero excess supply’ situation. When the market supply is not equal to the market demand, the market is not in equilibrium, and there is a propensity for the cost price to differ.
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