Economics: Determination of Price and Quantity: Price, Profit and Market Price

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Meanings

Price

The amount of money which is paid by a buyer to seller to acquire a product is called the price of the goods or service.

Profit

Profit is the amount of earnings that exceed all expenses. It is the difference between the total revenue i.e. total earnings and the total cost i.e. total expenses incurred by the seller.

Market Price

It is the price at which a goods or services are sold in the market.

There are various factors which influence the decision of fixing the price of a commodity which are as follows:

Cost of Production

It includes all the expenses which are incurred by the producer to produce a commodity like rent of land, machinery, wages to labour and selling and distribution expenses.

Price Fixed by Other Seller

Price fixed by the competitors of the same commodity determines the price of the commodity as if the other seller will offer the same product at lower price it will decrease the demand of our product in the market and vice. versa.

Expected Sales at Different Prices

The price of the commodity fixed by the seller must be such that the quantity of the commodity offered at different prices should be able to sell and earn a maximum profit to the seller.

Determination of Price

  • Determination of price means to determine the cost of goods sold and services rendered in the market. According to Law of Demand, the buyer buys more of a commodity at a lower price and less at a higher price, other factors remain constant and according to Law of Supply, the seller sell more of a commodity at a higher price and less at a lower price. The aim of the buyer is to get maximum satisfaction whereas of a seller is to get maximum profit. If price of quantity demanded and quantity supplied are equal it is called equilibrium price of the commodity. Hence, the forces of demand and supply determine the price of a commodity.

  • In some cases, the price of a commodity 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. Equilibrium price is a price at which quantity demanded and quantity supplied of a commodity is equal.

Determination of Equilibrium Price

Consider the below given the table of showing quantity demanded and supplied of mangoes to understand the determination of equilibrium price:

Quantity Demanded and Supplied of Mangoes

Quantity Demanded and Supplied of Mangoes
Quantity Demanded and Supplied of Mangoes

Price of Mangoes

(Per Kg)

Quantity demanded

Per day (Kgs)

Quantity supplied

Per day (Kgs)

50

100

300

45

150

250

40

200

200

35

250

150

30

300

100

It is observed that when the price of the mangoes is high the seller offers 300 kgs per day for sell but buyers are not willing to buy much. If the price of mangoes fall there is a rise in quantity demanded and fall in quantity supplied. Now due to excess supply of mangoes, the price falls to Rs. 40 and at this price buyers are willing to, but 200 Kgs of mangoes and sellers are also willing to supply same quantity of mangoes i.e. 200 Kgs. In this way, the equilibrium price is reached.

Disequilibrium Situations and Adjustment to Equilibrium Position

  • Disequilibrium is a situation where the forces determining equilibrium are not equal to each other. In the above table we can see that when price of mango is Rs. 50 per kg the demand is 100 kgs per day whereas, the supply is 300 kgs per day. This situation of excess of supply will lead to fall in price and will continue to fall till it reaches equilibrium price.

  • On the other hand, when the price of mango is Rs. 30 per kg the demand is 300 kgs per day whereas, the supply is 100 kgs per day. This situation of excess demand will lead to rise in price and will continue to rise till it reaches equilibrium price where the quantity demanded, and quantity supplies of mangoes are equal at 200 kgs per day.

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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