Determination of Price and Quantity

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In everyday life we do many economic transactions. Every transaction involves exchange of money. The amount of money which a buyer pays for one unit of a good or service to the seller is called Price. The objective of buyer is to get maximum satisfaction by spending minimum money and the objective of the seller is to get maximum profit. Profit is the difference between total revenue and total cost.

Formula for Profit
Formula for profit

Profit = Total Revenue – Total Cost

Where, Total revenue is the amount of money received from the sale of given volume of goods.

Total cost is the amount of money incurred by the seller to produce the given volume of goods.

Image of Profit for buyer and seller

Image of Profit for Buyer and Seller

Image of Profit for buyer and seller

The objectives of both the buyer and seller can be satisfied based on the price of the good or service. So, determination of price is a key decision in business. Basically, Price is determined by forces of demand and supply in the market. Some commodities which are essential for the masses will be decided by government in order to protect both buyers and sellers.

Determination of Price by Forces of Demand and Supply in the Market

Equilibrium price is a state of balance where the quantity demanded of a commodity is equal to quantity supplied. But in real life prices are not fixed at equilibrium price. Price could be either above the equilibrium price or below the equilibrium price. This is called as disequilibrium condition. There are two disequilibrium conditions which are excess demand (shortage of goods) and excess supply (surplus of goods). In both the cases market will operate in such a manner to attain equilibrium condition. Both Equilibrium and Disequilibrium conditions can be understood using demand and supply schedule.

Table 1.1 Quantity demanded and supplied of tomatoes

Quality Demanded and Supplied of Tomatoes
Quality demanded and supplied of tomatoes

Price of Tomatoes (in Rs. per kg)

Quantity demanded per day (kgs)

Quantity supplied per day (kgs)

20

100

300

18

150

250

16

200

200

14

250

150

12

300

100

Image of Price VS Quantity

Image of Price vs Quantity

Image of Price VS Quantity

Note: Price is on Y-axis and Quantity is on X-axis. Relation between Price and Demand, Price and Supply is based on Ceteris Paribus Assumption (keeping all other factors constant).

Note: Price is on Y-axis and Quantity is on X-axis. Relation between Price and Demand, Price and Supply is based on Ceteris Paribus Assumption (keeping all other factors constant).