Market Equilibrium under perfect competition

And effect of shift in demand and supply

Market Equilibrium under perfect competition

And effect of shift in demand and supply
Market Equilibrium:-The price at which quantity demanded and quantity supplied is equal is called as market
equilibrium point. Here 2 things are equal

1. Market Price/ Equilibrium Price

2. Market Quantity/ Equilibrium quantity.
It can be shown with the following schedule.

Number Price Supply Demand

1 10 8 50
2 15 10 30
3 20 20 35
4 22 25 25
5 30 30 20
In the given graph schedule it can be seen that at N=4 at price being 22 Quantity demanded and Supplied is 25 units only
and this is the only reason why it is the equilibrium point and equilibrium price is 22 and equilibrium quantity is 25.

Graph-

In the given graph X-Axis shows quantity and Y-Axis shows the price Dx is the demand
curve and Sx is the Supply curve.
Point E is the equilibrium point and OP and OQ is the equilibrium price and OQ is the
equilibrium quantity which means that at point OP price, OQ is the quantity demanded
and supplied.
Three Basic assumptions of the equilibrium under perfect competition are:-
1. Law of supply exits.
2. Law of Demand exists.
3. Forces of supply and demand operate freely in the market.
Change in Demand and market Equilibrium:-
There are two aspects of change in demand:-

1. Increase in demand: - When there is increase in quantity demanded due to other

factors effecting demand it is known as increase in demand. Demand curve shifts to right.
In the given graph X-Axis shows the quantity. Y-Axis shows the price Dx is the demand
curve and Sx is supply curve and E is the equilibrium point due to which OP is the
equilibrium Price and OQ is the equilibrium quantity.
Due to change in other factors affecting demand, there is change in demand and a new
demand curve DX` is formed towards the right due to which a new equilibrium price. OP`
is obtained and a new equilibrium quantity OQ` is obtained. This is higher than the initial
equilibrium price and quantity.
Increase in demand= Increase in Quantity

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Market Equilibrium under perfect competition
And effect of shift in demand and supply

Increase in price.

2. Decrease in demand: - When there is decrease in quantity demanded due to other

factors affecting demand. It is known as decrease in demand and in decrease in demand,
demand curve shifts left.
In the given graph X-Axis shows the quantity. Y-Axis shows the price Dx is the
demand curve and Sx is supply curve and E is the equilibrium point due to which OP is
the equilibrium Price and OQ is the equilibrium quantity.
Due to change in other factors affecting demand, there is change in demand and a new
demand curve DX` is formed towards the left due to which a new equilibrium price.
OP` is obtained and a new equilibrium quantity OQ` is obtained. This is lower than the initial equilibrium price and
quantity.
Increase in demand= decrease in Quantity
decrease in price.

Change in Supply and market Equilibrium:-

There are two aspects of change in Supply:-

1. Increase in Supply: - When there is increase in quantity supplied due to other
factors effecting demand it is known as increase in supplied. Supply curve shifts to
right.
In the given graph X-Axis shows the quantity. Y-Axis shows the price Dx is the
demand curve and Sx is supply curve and E is the equilibrium point due to which OP is
the equilibrium Price and OQ is the equilibrium quantity.
Due to change in other factors affecting Supply, there is change in Supply and a new
Supply curve Sx` is formed towards the right due to which a new equilibrium price
OP` is obtained which is less than initial Price and a new equilibrium quantity OQ` is
obtained, which is higher than the initial equilibrium quantity.
Increase in Supply = Increase in Quantity
decrease in price.

2. Decrease in Supply: - When there is decrease in quantity supplied due to other factors
effecting demand it is known as increase in supplied. Supply curve shifts to left.
In the given graph X-Axis shows the quantity. Y-Axis shows the price Dx is the demand
curve and Sx is supply curve and E is the equilibrium point due to which OP is the
equilibrium Price and OQ is the equilibrium quantity.
Due to change in other factors affecting Supply, there is change in Supply and a new
Supply curve Sx` is formed towards the left due to which a new equilibrium price OP` is
obtained which is higher than initial Price and a new equilibrium quantity OQ` is
obtained, which is lower than the initial equilibrium quantity.
Decrease in Supply = decrease in Quantity
increase in price.

Simultaneous change in demand and supply, and market equilibrium.

When there is change in supply and demand simultaneously there are two basic situations formed.
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Market Equilibrium under perfect competition
And effect of shift in demand and supply

Increase in demand and supply: - When both demand and supply increase due to factors affecting them then three
conditions are formed.
a. Change in Demand > Change in Supply
b. Change in Demand = Change in Supply
c. Change in Demand < Change in Supply

1. Increase in demand > Increase in Supply:-

In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the demand curve
Sx is the supply curve, E is the initial equilibrium point, OP is the equilibrium price and
OQ is the equilibrium Quantity.
Due to increase in demand and supply new curves Dx` and Sx` are formed simultaneously
and increase in demand is more than the increase in supply due to which new equilibrium
price OP` and OQ` are obtained. This is greater than the initial equilibrium price and quantity.
Increase in demand > Increase in Supply= Increase in price
Increase in Quantity
2. Increase in demand = increase in supply:-
In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the
demand curve Sx is the supply curve, E is the initial equilibrium point, OP is the
equilibrium price and OQ is the equilibrium Quantity.
Due to increase in demand and supply new curves Dx` and Sx` are formed
simultaneously and increase in demand is equal to increase in supply due to which
new equilibrium price and quantity OP` and OQ` are obtained. In which price is
constant and quantity is greater than the initial equilibrium quantity.
Increase in demand = Increase in Supply= No change in price
Increase in Quantity
3. Increase in demand < Increase in supply:-
In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the
demand curve Sx is the supply curve, E is the initial equilibrium point, OP is the
equilibrium price and OQ is the equilibrium Quantity.
Due to increase in demand and supply new curves Dx` and Sx` are formed
simultaneously and increase in demand is less than the increase in supply due to
which new equilibrium price OP` and OQ` are obtained. In which quantity is
greater than the initial equilibrium quantity and price is less than the initial
equilibrium price.
Increase in demand < Increase in Supply = decrease in price
Increase in Quantity

1. Simultaneous decrease in supply and demand: - When both demand and

supply decreases due to factors affecting demand and supply then three
conditions can take place.
a. Decrease in demand > Decrease in Supply
b. Decrease in demand =Decrease in Supply

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Market Equilibrium under perfect competition
And effect of shift in demand and supply

c. Decrease in demand < Decrease in Supply

4. Decrease in demand > Decrease in Supply:-
In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the demand curve Sx is the supply curve,
E is the initial equilibrium point, OP is the equilibrium price and OQ is the equilibrium Quantity.
Due to decrease in demand and supply new curves Dx` and Sx` are formed simultaneously and decrease in
demand is greater than the decrease in supply due to which new equilibrium price OP` and OQ` are obtained. In
which quantity is less than the initial equilibrium quantity and price is also less than the initial equilibrium price.
Increase in demand < Increase in Supply = decrease in price
decrease in Quantity
5. Decrease in demand= Decrease in Supply:-
In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the
demand curve Sx is the supply curve, E is the initial equilibrium point, OP is the
equilibrium price and OQ is the equilibrium Quantity.
Due to decrease in demand and supply new curves Dx` and Sx` are formed
simultaneously and decrease in demand is equal to the decrease in supply due to
which new equilibrium price OP` and OQ` are obtained. In which quantity is less
than the initial equilibrium quantity and price remains equal to the initial
equilibrium price.
Increase in demand < Increase in Supply = price is constant
decrease in Quantity
1. Decrease in demand< Decrease in supply:-
In the given graph X-Axis shows quantity Y-Axis Shows the price Dx is the
demand curve Sx is the supply curve, E is the initial equilibrium point, OP is the
equilibrium price and OQ is the equilibrium Quantity.
Due to decrease in demand and supply new curves Dx` and Sx` are formed
simultaneously and decrease in demand is greater than the decrease in supply due
to which new equilibrium price OP` and OQ` are obtained. In which quantity is
less than the initial equilibrium quantity and price is more than the initial
equilibrium price.
Increase in demand < Increase in Supply = Increase in price
decrease in Quantity

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