Price Determination

In this topic, we will focus on how market price and market quantity are determined. So, we will determine the market equilibrium. 

Definition of Market equilibrium

Market equilibrium is a situation when quantity demanded and quantity supplied are equal and there is no tendency for price or quantity to change.

Quantity Demanded (Qd) = Quantity Supply (Qs)

Market equilibrium is determined by the intersection of both the demand and supply curves. By plotting demand and supply curve on the same set of exist as in figure 2.8, it possible to graphically see how the equilibrium price and quantity are determined.

Table 2.7: Determinant of equilibrium Price and Quantity

Price (RM)	Quantity Demanded (units)	Quantity Supplied (units)	Market Condition
1	10	2	Shortage
2	8	4	Shortage
3	6	6	Equilibrium
4	4	8	Surplus
5	2	10	Surplus

Shortage

Shortage is the situation where the price was set up below than equilibrium price. In others words, the quantity demanded is greater than the quantity supplied. In figure 2.8, at the price RM10, buyers are willing to buy 15 units but sellers only sell 5 units. There is occurring the excess demand. The amount of excess demand (shortage) is 10 units (Qd – Qs). If the shortage happened, the rational customer or producer will accept that price and sell back at the market price.

Surplus

Surplus is the situation where the price was set up above than equilibrium price. In others words, the quantity supplied is greater than the quantity demanded. In figure 2.9, at the price RM15, sellers are produce 15 units but buyers only buy 5 units. There is occurring the excess supply. The amount of excess supply (surplus) is 10 units (Qs – Qd).