Question
How is equilibrium price determined? How is it affected by changes in demand for the commodity?
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Answer
Equilibrium price is determined at a point where market demand is equal to market supply. Other things being equal, equilibrium price increases with an increase in demand and falls with a decrease in demand, as shown in the given figure
At $DD$ demand curve Equilibrium point = E, equilibrium price = $OP$ At $D_1 D_1$ demand curve (increase in demand) New equilibrium point = $E_1$ Equilibrium price = $OP_1 ~OP_1 > OP$ (increase in price) At $D_2D_2$ demand curve (decrease in demand) New equilibrium point = $E_2$ Equilibrium price = $OP_2 ~OP_2 < OP$ (decrease in price) Assumption Supply remains constant.
At $DD$ demand curve Equilibrium point = E, equilibrium price = $OP$ At $D_1 D_1$ demand curve (increase in demand) New equilibrium point = $E_1$ Equilibrium price = $OP_1 ~OP_1 > OP$ (increase in price) At $D_2D_2$ demand curve (decrease in demand) New equilibrium point = $E_2$ Equilibrium price = $OP_2 ~OP_2 < OP$ (decrease in price) Assumption Supply remains constant.
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