Determination of Market Equilibrium under Perfect Competition

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 Perfect competition is a market where there are a large number of buyers as well as sellers. Equilibrium under Perfect Competition is a state where market demand matches the market supply. When market demand and market supply balance each other, there occurs a situation of equilibrium in the market. During equilibrium, price and quantity become stable. Equilibrium is the state of no change. The stable price is known as the Equilibrium Price, and the stable quantity is known as the Equilibrium Quantity.

Market Supply = Market Demand

What is Equilibrium Price under Perfect Competition?

Equilibrium Price is also known as a market-clearing price. It is the price that is derived by market forces of demand and supply and occurs when market demand is equal to market supply.

What is Equilibrium Quantity under Perfect Competition?

Equilibrium Quantity is when there are no shortages or surpluses in a product in the market. The quantity that customers/consumers want to buy at a particular price at a particular point in time is equal to the quantity that the suppliers want to sell.

Determination of Equilibrium Price and Equilibrium Quantity under Perfect Competition

The intersection of the demand curve and supply curve decides the equilibrium price and the equilibrium quantity. There is only one point where equilibrium price and equilibrium quantity can be achieved; i.e., the intersection of the supply curve and the demand curve.

Equilibrium Price and Equilibrium Quantity in case of Excess Demand (Shortage)

When there is more demand for the product than supply in the market, the occurred situation is said to be Excess Demand or Shortage.

Equilibrium Price and Equilibrium Quantity in Case of Excess Supply (Surplus)

Excess supply is a market condition when the quantity supplied is greater than the demand for the commodity. It occurs at prices greater than the equilibrium price. There occur some conditions when prices in the market are higher than the equilibrium price.

Effects of Changes in Demand and Supply on Market Equilibrium

Equilibrium Price and Equilibrium Quantity of a commodity is determined when the quantity demand is equal to the quantity of the commodity supplied. Therefore, if there is any change in the quantity demanded and/or quantity supplied of the commodity, there will be a shift in either the demand curve or supply curve or both, further resulting in a change in equilibrium price and equilibrium quantity. There are many factors that affect equilibrium price and equilibrium quantity. Factors other than the price of the product affect demand and supply in the form of movements in the curves. These movements cause a rightward or a leftward shift in demand and supply curves affecting equilibrium price and equilibrium quantity.


Some of the reasons responsible for a shift in the demand curve include Change in Population, Change in Price of Complementary Goods, Change in Price of Substitute Goods, Change in Income (Normal and Inferior Goods), Change in Taste and Preference, and Expectation of Change in the Price in Future. However, the reasons responsible for a shift in the supply curve include Change in Price of Factors of Production, Change in Price of other Goods, Change in the State of Technology, Change in the Taxation Policy, Expectations of Change in Price in Future, Change in the Goals of Firms, and Change in the Number of Firms.


1. Effects of Change in Demand

A shift in demand means an increase in demand or a decrease in demand. It occurs due to changes in determinants other than the own price of the commodity. For example, with an increase in income (other factors being constant), consumers will be able to buy more units of a product at the same price. This will cause a shift in demand, which will be indicated by a rightward shift in the demand curve. Similarly, with the decrease in income (other factors being constant), consumers will buy fewer units of any product at the same price. This will cause a shift in demand, which will be indicated by a leftward shift in the demand curve.


Case I - Increase in Demand

Case II - Decrease in Demand

2. Effects of Change in Supply

A shift in supply means an increase in supply or a decrease in supply. It occurs due to changes in determinants, other than the own price of the commodity. For example, supply increases when production cost falls leading to a fall in input price and supply decreases when production cost rises resulting in a rise in input price. This will cause a shift in supply, which will be indicated by a rightward or leftward shift in the supply curve.


Case I - Increase in Supply

Case II - Decrease in Supply

3. Effects of Simultaneous Change in Demand and Supply
Case I - Both Demand and Supply Decrease
(i) Decrease in Demand is equal to Decrease in Supply

(ii) Decrease in Demand is greater than Decrease in Supply

(iii) Decrease in Demand is less than Decrease in Supply
Case II - Both Demand and Supply Increase

(ii) Increase in Demand is greater than Increase in Supply

(iii) Increase in Demand is less than Increase in Supply

Case III - Demand Decreases and Supply Increases
(i) Decrease in Demand is equal to Increase in Supply
(ii) Decrease in Demand is greater than Increase in Supply
(ii) Decrease in Demand is less than Increase in Supply
(iii) Increase in Demand is less than Decrease in Supply

4. Special Cases

Case 1 - When Supply is Perfectly Elastic

Case 2 - When Supply is Perfectly Inelastic
Case 3 - When Demand is Perfectly Elastic
Case 4 - When Demand is Perfectly Inelastic

Price Ceiling and Price Floor or Minimum Support Price (MSP): Simple Applications of Supply and Demand


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