Recollect this concept from Chapter 2, where we have procured the market demand curve for cost price taking customers and for price taking enterprises . The market supply curve was procured in Chapter 4, under the presumption of a fixed number of enterprises.
In this segment, with the help of these two curves, we will look at how supply and demand forces work together to decide where the market will be in equilibrium when the number of enterprises is fixed. We will learn how the equilibrium cost price and quantity changes due to the shifts in demand and supply curves.
Similarly, if the persuading cost price is (a2), the market supply (b2) will exceed or surpass the market demand (b’2) at that cost price, giving an increase to the excess supply equal to (b’2 b2). In such a case, some enterprises will not be able to sell at the amount they prefer to; hence, they will decrease their cost price. Other things remain constant as the cost price decreases.
The quantity demanded increases, while the quantity supplied decreases. And at a cost price (a*), the enterprises are able to sell their desired output as the market demand equals the market supply. Hence, a* is the equilibrium cost price and the proportional quantity a* is the equilibrium quantity.
Also read: What Is Market Equilibrium?
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