How is price and quantity now determined?
At a given price a certain quantity will be demanded and a certain quantity be produced...
So once one has a supply and a demand curve for a given product or service one can turn to the question how price and the quantity bought and sold is determined.
The first step is to draw the two curves in one diagram. These graphic representations will aid a person in analysing what the likely behavoiur of the participants in the market would be under different price conditions.
It is important to note that in terms of the underlying assumptions (such as the instant availability of information) there can only be one prevailing price at any given time on the market.
Suppose the ruling price is R 120 as depicted in the graph below, the quantity demanded will be 10. At that price the quantity supplied will be 100. The quantity supplied will be more than the quantity demanded - there will be an excess supply on this market (an oversupply of 90 units or FE).
Where one has an excess supply on a market it will lead to sellers wanting to rather sell at a lower price than to return from the market with unsold goods. Excess supply causes suppliers to compete with each other by offering their goods at prices below the original ruling price - since only one price can prevail on the market, which price will it be? - it will be the lower price, since the products are homogeneous and thefore it is assumed no brand loyalty, the purchaser will purchase from the lower priced supplier - so all sellers will have to drop their prices to sell anything.
Suppose on the other hand, that a price level of R 10 (LM in the figure above) is taken as a starting point. At this price the
quantity demanded is 100 units (M) and the quantity supplied 100 units (L). In this case the quantity demanded exceeds th equantity supplied by90 units (LM).This difference is called excess demand or a shortage.
Excess demand causes competition between buyers who would rather pay more for a product than return from the market empty handed and potentially unfulfilled needs.
To be continued