Question

Answer the following question in $$20$$ sentences.
Explain the Market equilibrium with the fixed number of firms with the help of a diagram.

Answer 1

The equilibrium price and quantity are determined at the intersection of the market demand and market supply curves when there is fixed number of firms.

Figure above illustrates equilibrium for a perfectly competitive market with a fixed number of firms. Here SS denotes the market supply curve and DD denotes the market demand curve for a commodity. The market supply curve SS shows how much of the commodity firms would wish to supply at different prices, and the demand curve DD tells us how much of the commodity, the consumers would be willing to purchase at different prices. Graphically, an equilibrium is a point where the market supply curve intersects the market demand curve because this is where the market demand equals market supply. At any other point, either there is excess supply or there is excess demand. if the prevailing price is p1, the market demand is q1 whereas the market supply is q1’ . Therefore, there is excess demand in the market equal to q1’ q1. Some consumers who are either unable to obtain the commodity at all or obtain it in insufficient quantity will be willing to pay more than p1. The market price would tend to increase. All other things remaining the same as price rises, quantity demanded falls and quantity supplied increases. The market moves towards the point where the quantity that the firms want to sell is equal to the quantity that the consumers want to buy. This happens when price is p* , the supply decisions of the firms only match with the demand decisions of the consumers. Similarly, if the prevailing price is p2, the market supply (q2) will exceed the market demand ( q ‘2 ) at that price giving rise to excess supply equal to q2 ‘ q2. Some firms will not be then able to sell quantity they want to sell; so, they will lower their price. All other things remaining the same as price falls, quantity demanded rises, quantity supplied falls, and at p*, the firms are able to sell their desired output since market demand equals market supply at that price. Therefore, p* is the equilibrium price and the corresponding quantity q* is the equilibrium quantity.