Recollect this concept in Chapter 2, 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 2 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 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 increase to excess supply equal to b’2 b2. Some enterprises will not be then able to sell the amount they prefer to; hence, they will decrease their cost price. Other things remaining constant as cost price decreases, quantity demanded increases, quantity supplied decreases, and at a*, the enterprises are able to sell their desired output since market demand equals market supply at that cost price. 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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