Interaction between Demand and Supply. |
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| Ans : Demand and supply are the market forces. When there is interaction between market demand and market supply, equilibrium price and quantity are determine. In other words, equilibrium price is determined at a point where market demand is equal to market supply.
The interaction between demand and supply can be explained with the following table and diagram:
Price (Rs.)
Demand
Supply
Result
5
30
10
Excess Demand
10
20
20
Equilibrium
15
10
30
Excess Supply
From the above table it is clear that when price of the commodity is Rs.10, quantity demanded and quantity supplied are equal to each other. This is the point of equilibrium. At this equilibrium price, the buyer is ready to demand 20 units and supplier is ready to supplied 20 units. All other prices, the market is in this equilibrium. At price less than Rs.10 there is excess demand and at price more than Rs.10 there is excess supply. In a free market, this equilibrium creates the condition for equilibrium.
In the given diagram, ox-axis represents quantity demand and supply and oy-axis represent price of commodity. DD is the demand curve and SS is the supply curve. Demand and supply curve intersect each other at point ‘E’ which is equilibrium point. At point ‘E’, demand for a commodity is equal to supply. In this case, both quantity demand and quantity supply are 20 units at Rs.1Q (Qd=Qs=20 units). At any point above equilibrium point, there is excess supply and there is surplus. Therefore, producer will reduce the price and supply less. Simultaneously demand increase with fall in price and therefore excess supply will be eliminated.
Similarly, at any point below equilibrium point, there is excess demand due to which there is shortest in the market. This shorted will force buyers to bid a higher price and producer will increase the price and supply more. This process of adjustment will continue as long as demand equals supply.
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