Under Perfect Competition, price of a commodity is not determined by any individual seller or a firm. It is determined by the forces of market supply and market demand for a commodity. In other words, it is determined by the industry. Equilibrium Price of a commodity is determined at that point where the market demand for the product is equal to its market supply. A firm can sell its product at the price determined by the industry. Firm cannot determine the price. It means, that demand curve of a firm is perfectly elastic or horizontal parallel to X- axis. It is further explained by the given table and fig.(a) and (b).
Schedule of Demand and Supply:
It is clear from the table that equilibrium price is Rs. 3, when both demand and supply is 30 units: If price falls below this to Rs. 2, demand becomes 40 and supply falls to 20. This imbalance will again bring the price to three rupees, since all buyers won’t be able to buy the product at Rs. 2, and each buyer will be ready to pay a higher price to get the product.
Similarly, if the price increases to say Rs 4 from Rs. 3, the product’s demand will reduce to 20 units while supply will increase to 40 units. Now, the seller will have to reduce the price to sell all his products, and it will revert to Rs. 3. Thus Rs. 3 will be the prevailing price in market. This is the equilibrium price and 30 units will be the equilibrium quantity.
This data can be further clarified with help of figures, as below :
