Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
Table 3.1 
Price (Rs.) 
Quantity 
Demanded 
(Units) 
Quantity Supplied (Units) 
50 
100 
500 
40 
200 
400 
30 
300 
300 
20 
400 
200 
10 
500 
100 
In the above schedule when the price is Rs.50/- the 
quantity demanded is only 100 units while the quantity supplied is 
500 units. As price falls to Rs. 40/- the quantity demanded 

---

increases to 220 units while the quantity supplied decreases to 
400 units. However, when the price is Rs.30/- both demand and 
supply are equal at 300 units and therefore Rs. 30 is called as the 
equilibrium price. 
Similarly, when the price is Rs. 10 the quantity demanded is 
500 units while the quantity supplied by the seller is only 100 
units. As price rises to Rs. 20, the quantity demanded falls to 400 
units while the quantity supplied rises to 200 units. As the price 
rises to Rs.30/-, however, both demand and supply are equal at 
300 units and therefore Rs. 30 is called as the equilibrium price. 
The above schedule is graphically represented as follows: 
Quantity Demanded & Supplied 
 
Figure 3.4 
 
In the above diagram, on the X-axis quantity demanded and 
supplied is measured while on the Y-axis price is measured. In the 
diagram supply curve 'SS' slopes upward indicating the direct 
relationship between quantity supplied and price while the 
demand curve 'DD' slopes downwards indicating the inverse 
relationship between price and quantity demanded. At point E 
quantity demanded is equal to quantity supplied i.e. at price 
Rs.30/-, 300 units are demanded and supplied. Therefore, point 
'E' is known as the point of equilibrium. At this point quantity 
demanded is equal to quantity supplied i.e. 300 units and the 
equilibrium price is Rs. 30/-. 
Under perfect competition a single price exists. If the price 
rises above the equilibrium price, the existing sellers will supply 
more and new firms will enter the market and offer their goods for 
sale. However, demand contracts as some of the buyers buy less 
than before and the marginal buyers drop out. As a result, the 

---

competition among the sellers will lower the price to equilibrium 
price where quantity supplied is equal to quantity demanded. 
If the price falls below the equilibrium price, the existing 
sellers will supply less and some sellers will leave the market. 
However, demand rises as the existing buyers will buy more and 
the marginal buyers will also enter the market. As a result, the 
competition among buyers will push the price up to the equilibrium 
price where quantity supplied is equal to quantity demanded. 
Thus, equilibrium price under perfect competition is 
determined by the automatic adjustment of demand and supply. 
Prof. Marshall has compared the process of price determination to 
the cutting of cloth with a pair of scissors. As two blades are 
required to cut the cloth, so the two blades - demand and supply 
are required to determine the price in the market. Although one 
blade may be more active than the other and more effective than 
the other, the presence of both is necessary.