Market Equilibrium in Terms of Demand Price and Supply Price

In this article we will discuss about the market equilibrium in terms of demand price and supply price.

Let us first give the definitions. Demand price (p^d) is the price that the buyers are willing to pay to demand a certain quantity (q) of the good.

At any q, demand price is obtained along the demand curve. For example, if the buyers want to pay a price of Rs 20 to demand 500 units, of the good per period, then the demand price at the quantity demanded of 500 units is Rs 20.

Demand price (p^d) is a single valued function of quantity demanded (q^d). This function is negative, i.e., as q^d increases (or decreases), p^d will fall (or rise), because of the law of demand which says that the buyers will demand a larger quantity only when they are asked to pay a smaller price.

In terms of geometry, if the demand curve is given by DD in Fig. 1.17, then, at any quantity, q₁, the demand price is p₁^d, for at this price, the quantity of q₁ would be demanded. Supply price (p^s), on the other hand, is defined as the price wanted by the suppliers of the good to supply a certain quantity.

At any q, the supply price is obtained along the supply curve. For example, if the suppliers want the price to be Rs 15 to supply 500 units of the good, then the supply price at the quantity supplied of 500 units is Rs 15.

Supply price (p^s) is a single-valued function of quan­tity supplied (q^s). This function is positive, i.e., as q^s in­creases (or decreases), p^s will rise or fall because of the law of supply which says that the producers will supply a larger quantity only if they get a larger price.

In terms of geometry, again, if the supply curve is given by SS in Fig. 1.16, then, at any quantity q₁, the supply price is p₁^s, for, at this price the quantity of q₁ would be supplied.

Now, if at a certain quantity like q₁, the demand price of the good, p₁^d, is larger than its supply price, p₁^s then at the price of p₁^d quantity demanded would be q₁ but quantity supplied would be larger, it would be q₂ (since the demand price is larger than the supply price).

Therefore, in the competitive market, the price would be falling, and, consequently, q^d would be rising and q^s would be falling till the market reaches the equilibrium at q^d = q^s = q₀ and p^d = p^s = p₀ at the point E which is the point of intersection of the demand and supply curves.

Looking from the other side, if, at the quantity q₁ the supply price p₁^s is smaller than the demand price p₁^d,.then at the price of p₁^s, the quantity supplied will be q₁ but the quantity demanded would be larger (since supply price is less than the demand price), it would be q₃.

Therefore, now the price in the market would be rising, and consequently, q^s would be rising and q^d falling, till the market is in equilibrium at q^d = q^s = q₀ and p^d = p^s = p₀ at the point of intersection, E, between the DD and SS curves.