Determination of Price and Quantity: Meaning and Determination of Price (For CBSE, ICSE, IAS, NET, NRA 2022)

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Meaning of Price

  • The amount of money which a buyer pays for one unit of a good or service to the seller, is called the price of the good or service.
  • example a buyer pays ₹ 36 to buy one liter of full cream milk, the price of full cream milk will be ₹ 36 per liter.
  • The seller fixes the price of the commodity supplied by him. The market price of a commodity is the price at which it is sold in the market. While fixing the price of a commodity the seller keeps in mind many factors besides earning maximum profit.

Some of the important factors which influence the decision of a seller in fixing the price of a commodity are given below:

  • Cost of production: A seller fixes the market price of his commodity which is more than the per unit cost of production of commodity. The difference between the per unit price and per unit cost of production of the commodity is profit per unit.
  • Price fixed by other sellers: it is very important for the seller of a commodity to fix the price of his commodity which is comparable to the price of other sellers in order to earn maximum profit.
  • Expected sales at different prices: The seller also considers the quantity of the commodity he will be able to sell at different prices. So, the price of the commodity fixed by him must be such that the total quantity of the commodity sold by him gives him maximum total profit.

Meaning and Determination of Price

According to the law of supply, the sellers of a commodity are willing to sell more of it at a higher price and less of it at a lower price, other factors determining supply remaining constant. The aim of buyer is to get maximum satisfaction by spending minimum and the aim of the seller is to get maximum profit. If at a price both quantity demanded, and quantity supplied of a commodity are equal that is called equilibrium price of the commodity. In this way, the price of a commodity is determined by the forces of demand and supply in the market. But in case of some commodities, the price is determined by the government to protect the interest of consumers or producers.

Meaning of Equilibrium Price

  • equilibrium is a situation where the forces determining equilibrium are in balance or are equal to each other. Here the forces determining equilibrium price are quantity demanded and quantity supplied of the commodity. The price at which quantity demanded of a commodity is equal to its quantity supplied is called the equilibrium price.
  • At equilibrium price quantity demanded and quantity supplied of a commodity are equal. This quantity is called the equilibrium quantity of the commodity.

Determination of Equilibrium Price

Determination of Equilibrium Price
Price of tomatoes

(₹ per kg)

Quantity demanded

per day (kgs)

Quantity supplied

per day (kgs)

20100300
18150250
16200200
  • In table, it is observed that when the price of tomatoes is ₹ 20 per kg, the seller offers 300 kg of tomatoes for sale, but the buyers are willing to buy only 100 kg of tomatoes. If the price falls to ₹ 18 per kg, the quantity demanded rises to 150 kg, but the quantity supplied falls to 250 kg of tomatoes. In both the cases, the quantity supplied of tomatoes is more than its quantity demanded showing excess supply of tomatoes. This will result in further fall in price of tomatoes.
  • Now due to excess supply, the price of tomatoes falls to ₹ 16 per kg. At this price buyers are willing to buy 200 kg of tomatoes and the sellers are also willing to sell the same quantity of tomatoes i.e.. 200 kg of tomatoes. This is how equilibrium price in reached.

Disequilibrium Situations and Adjustment to Equilibrium Position

In the table see that at prices ₹ 12 and 14 (less than equilibrium price) quantity demanded and supplied are not equal. Similarly, at prices ₹ 20 and 18 (more than equilibrium price) quantity demanded and supplied are also not equal. These two situations are disequilibrium situations.

Disequilibrium Situations and Adjustment to Equilibrium Position
Price of tomatoes

(₹ per kg)

Quantity demanded

per day (kgs)

Quantity supplied

per day (kgs)

20100300
18150250
16200200
14250150
18300100

Consider the situation in which the market price of tomatoes is ₹ 12 per kg. At this price, the buyers are willing to buy 300 kg of tomatoes whereas the sellers are willing to sell only 100 kg of tomatoes. Similarly, when the price of tomatoes is ₹ 14 per kg the quantity demanded of tomatoes falls to 250 kg and quantity supplied rises to 150 kg. Both these case show excess demand of tomatoes in the market.

Effect of Change in Demand on Equilibrium Price and Quantity

An increase in the demand of the commodity will lead to increase in equilibrium price and quantity demanded and supplied of the commodity. On the other hand, if demand for the commodity decreases but its supply remains the same, it will lead to decrease in equilibrium price and quantity demanded and supplied of the commodity.

Effect of Change in Supply on Equilibrium

Price and Quantity

When the supply of a commodity increases but its demand remains the same, equilibrium price will decrease but equilibrium quantity demanded and supplied will increase. On the other hand, when the supply of a commodity decreases but its demand remains the same, its equilibrium price will increase but equilibrium quantity demanded and supplied will decrease.

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