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Price and output determination under  perfect competition

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Price and output determination under  perfect competition

Determination of price and output in the market or industry:-

In perfect competition, the equilibrium price and output are determined from the interaction between two market forces: demand and supply. At different prices, different quantities of a commodity are demanded and supplied. The competition between buyers and sellers move the price up and down and finally settle at that point where the quantity demanded becomes equal to the quantity supplied. This is called price determination through interaction between demand and supply.

The process of price determination can be explained by the help of following schedule and diagram:-

Price per unit (Rs)
Quantity demanded (in Kg)
Quantity supplied (in Kg)
Remarks
5
30
10
Excess demand
10
20
20
Equilibrium
15
10
30
Excess supply

             In the above table, we can see the inverse relationship between price and quantity demanded and a positive relationship between price and quantity supplied. This relation can also be explained by the help of the following diagram:-
Determination-of-price-and-output-in-the-market-or-industry
In the above figure, we can see that when the combination points of price and quantity demanded are plotted and joined together, we get a downward sloping curve known as the demand curve. When the combination points between price and quantity supplied are plotted and joined together, we get an upward sloping curve known as the supply curve. The equilibrium is determined at point 'E' where DD demand curve and SS supply curve intersect each other. This equilibrium price and quantity are determined by the market and industry which should be accepted by all the firms under the industry.

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