the exchange rate is determined by market forces of demands and supply is called as
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Market Equilibrium under Perfect Competition
Recollect that in a perfect competition price is determined by the industry, the most important characteristic is that no individual consumer or producer can alter the price. A firm is merely reduced to a price taker. Equilibrium refers to a state of balance, a position in which there is no tendency to change.
Evidently, in a perfectly competitive market equilibrium is visualised at a point where market supply becomes equal to market demand. Let’s revisit the market demand and supply.
Market demand is the demand for a commodity in the market. It is the sum total of individuals demand by all buyers of the commodity in the market. Similar to demand curve, a market demand curve also slopes downwards due to the operation of the law of demand.
Market supply is the sum total of individual supplies by all producers of the commodity in the market. Essentially, is the total supply of the commodity. Similar to a supply curve, a market supply curve also slopes upwards due to the operation of the law of supply.
Combining both, the market attains equilibrium when the market supply and market demand of a commodity become equal. The price at which market attains equilibrium is termed as the equilibrium price and the quantity supplied or demanded (essentially equal at the equilibrium) at this price is known as the equilibrium quantity. Graphically, at equilibrium, the market demand curve and market supply curve intersect with each other. This intersection point is the point of equilibrium.
Recollect that in a perfect competition price is determined by the industry, the most important characteristic is that no individual consumer or producer can alter the price. A firm is merely reduced to a price taker. Equilibrium refers to a state of balance, a position in which there is no tendency to change.
Evidently, in a perfectly competitive market equilibrium is visualised at a point where market supply becomes equal to market demand. Let’s revisit the market demand and supply.
Market demand is the demand for a commodity in the market. It is the sum total of individuals demand by all buyers of the commodity in the market. Similar to demand curve, a market demand curve also slopes downwards due to the operation of the law of demand.
Market supply is the sum total of individual supplies by all producers of the commodity in the market. Essentially, is the total supply of the commodity. Similar to a supply curve, a market supply curve also slopes upwards due to the operation of the law of supply.
Combining both, the market attains equilibrium when the market supply and market demand of a commodity become equal. The price at which market attains equilibrium is termed as the equilibrium price and the quantity supplied or demanded (essentially equal at the equilibrium) at this price is known as the equilibrium quantity. Graphically, at equilibrium, the market demand curve and market supply curve intersect with each other. This intersection point is the point of equilibrium.
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