Price tends towards the level which equates supply with demand'. Explain this statement.
Price tends towards the level which equates supply with demand'. Explain this statement.
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Explanation
(i) Price of goods is determined by the interaction of the forces of demand and supply.
(ii) If the price is at a level where supply is less than demand, then there will be excess demand which may increase the price. For example, at price OP\(_1\), OQ\(_2\) was supplied while OQ\(_3\) was demanded.
(iii) If the price is at a level where supply is greater than demand (above equilibrium), there would be excess supply, leading to a fall in price. For example, at price OP\(_2\), OQ\(_4\) was supplied while OQ\(_1\) was demanded.
(iv) The equilibrium price is OP\(_0\) where demand is equal to supply. There is no tendency for price to change. The quantity supplied is equal to quantity demanded at OQ\(_0\)