CBSE Class 12-commerce Answered

Under perfect competition with a fixed number of firms, the equilibrium price is determined by the interaction of demand and supply curves in the market.

In the above figure, SS indicates market supply curve and DD indicates market demand curve for good. Demand and supply of good are shown at various levels of price. Equilibrium (E) is a point where the market supply curve intersects the market demand curve because the market demand equals the market supply. If the price is P₁, the market demand is Q₁ and market supply is Q₁'. Here the demand is greater than the supply. If the price is P_2, the market demand is Q₂' and the market supply is Q_2. Here the market supply is greater than the market demand. Thus, P is the equilibrium price and the corresponding quantity Q is the equilibrium quantity.