Market Determination of Equilibrium Price and Quantity:

In the competitive market the determination of market price and quantity is by the market mechanism. The market mechanism is the process by which the market forces of demand and supply interact to establish a market price and determine the quantity of a commodity exchanged in a market.

Table shows the demand and supply schedules of Amala. Quantity demanded exceeds quantity supplied at the price range of c1,000 to c4,000. For example, at c1,000 price, consumers want to consume 120 bags whilst producers are not willing to supply the product resulting in an excess demand or shortage of 120 bags. At c4,000 price, consumers want to purchase 60 bags whilst producers are willing to supply only 30 bags resulting in excess demand or shortage of 30 bags. None of these can remain as the market price of Amala for the excess demand will force the price up.

Quantity supplied exceeds quantity demanded at prices greater than c5,000. For instance, at c6,000 price of Amala, consumers want to buy only 20 bags whilst producers are willing to offer 50 bags for sale resulting in an excess supply or surplus of 30 bags. C6,000 cannot remain as the market price for the excess supply will force the price down.

At c5,000 price of Amala, the quantity consumers are willing to consume is equal to the quantity producers are willing to offer for sale of 40 bags. In economics this price is called the market-clearing or equilibrium price and the 40 bags of Amala is the equilibrium quantity.Equilibrium price is the price of a commodity that equates quantity demanded and quantity supplied. It is the price that clears the market and leaves it with no unsatisfied buyers or sellers (excesses).