Determination of Price and Quantity

The Meaning of PriceA seller sells a commodity in exchange for money.

The buyer pays money to the seller in exchange for goods and services.

The amount of money the buyer

pays for the goods and services

to the seller is called

“the price of the good or service”

Review some concepts…

• The Main aim of the seller is to….earn profit.

• Profit is the difference between…..Total revenue and Total cost.

• Total Revenue is the amount received by the seller for selling the goods and services.

• Total cost is the amount spent by the producer for producing the goods and services.

Factors influencing the seller while fixing the price.

1. Cost of production(COP): Price should be more than the per unit cost of

production(COP). Price > COP

• The difference between the per unit price and per unit cost of production of commodity is profit per unit.PRICE – COP = PROFIT

• Higher the difference between the Price and COP, higher the profit.

• So fixing of a price for a commodity is very important for a seller.

Factors influencing the seller while fixing the price.

2.Price fixed by other sellers.While fixing the price of his commodity, the seller must consider

the price of commodity fixed by the other sellers

of the same commodity.

If the seller fixes a prices which is higher than the price

fixed by other sellers, he will not be able to sell more quantity.

So to sell more he should fix a price

which is equal or near the price of other sellers, so he can earn profit.

Factors influencing the seller while fixing the price.

• 3. Expected sales at different prices:The seller must fix a price, such that the quantity sold gives him maximum profit.

Meaning and Determination of Price

( According to the law of demand,the buyer of a commodity buys more at a low price and less at a high price.)

(According to law of Supply, the seller of a commodity will sell more at a higher price.)

If a seller FIXES A HIGH PRICE quantity supplied will be more than quantity demanded.

If a seller FIXES A LOW PRICEQuantity demanded will be more than quantity supplied.

The aim of the buyer is to get maximum satisfaction by spending less.

The aim of the seller is to get maximum profit.

If at a price both quantity demanded and quantity supplied of a commodity are equal that is called EQUILIBRIUM PRICE.

The price of a commodity is determined by the forces of demand and supply in the market.

• The Price at which quantity demanded

is equal to the quantity supplied

is called the equilibrium price.

• At Equilibrium price quantity demanded and quantity supplied

of a commodity are equal.

• This quantity is called

the equilibrium quantity of the commodity

Determination of Equilibrium PriceThe Seller wants to sell at a higher price. The consumer wants to buy at a lower price.

Observations:1.When the price is Rs.20/- the seller offers 300kg of tomatoes for sale. but the buyer is willing to buy only 100kgs.

2. If the price falls to Rs.18/- the quantity demanded rises to 150 but the quantity supplied falls to 250.

3. In both the above cases the quantity supplied is more than the quantity demanded.

4. Due to excess supply of tomatoes the price keeps falling.

5.The price of tomatoes falls to Rs.16/-.

6.At this price the buyer is willing to buy 200kgs and the seller is also willing to sell 200kgs.

7.Thus Rs.16/- is the EQUILIBRIUM price of tomatoes at which quantity demanded is equal to quantity supplied

Quantity demanded and supplied of tomatoes

Price of

Tomatoes (Rs.

Per kg)

Quantity

demanded

per day(kgs)

Quantity

supplied per

day (kgs)

20 100 300

18 150 250

16 200 200

14 250 150

12 300 100

Determination of Equilibrium Price

1)When DD> SS price starts rising.

2)This rise in price continues until demand = supply.

3)When SS > DD price starts falling.

4)This fall in price continues until demand = supply.

5)This price at which demand = supply is called equilibrium price.

6)Hence, equilibrium price of a commodity is determined by the market forces of demand and supply.

Excess Supply : Qty SS is more than Qty DD

Excess Demand Qty DD is more than Qty SS

EquilibriumEquilibrium Price

Equilibrium Quantity

Disequilibrium situations

Quantity demanded and supplied of tomatoes

Price of

Tomatoes (Rs.

Per kg)

Quantity

demanded

per day(kgs)

Quantity

supplied per

day (kgs)

20 100 300

18 150 250

16 200 200

14 250 150

12 300 100

In the table shown:1.At prices Rs.14 and Rs. 12 the quantity demanded and quantity supplied are not equal. Here the price is less than the EQUILIBRIUM price.

2. At prices Rs.20 and Rs. 18 the quantity demanded and the quantity supplied are also not equal the price is more than the EQUILIBRIUM price.

3. These two situations are disequilibrium situations.

Adjustment to equilibrium position

• 1. When the Quantity supplied is more than quantity demanded and price is more than the equilibrium price, the price falls till quantity supplied is equal to quantity demanded.

• Excess Supply• Qty SS > Qty DD Price Fall

• till it Qty SS = Qty DD• This is the Equilibrium Price

• 2. When Quantity demanded is more than quantity supplied and price is less than the equilibrium price, the price rises till quantity demanded is equal to quantity supplied.

• Excess Demand• Qty DD > Qty SS Price rise • till it reaches Qty DD = Qty SS• This is the Equilibrium Price

• 3. Thus in our example when the price reaches Rs.16. both quantity supplied becomes equal to quantity demanded. This is the Equilibrium price and the quantity sold at this

price is the Equilibrium quantity.

Effect of change in demand on equilibrium price and quantity and supply remains same

When the demand for a good increases but its supply remains the same:Equilibrium price and quantity demanded and supplied increases.

When the demand for a good decreases but its supply remains the same:Equilibrium price and quantity demanded and supplied

decreases.

EQ.1

DD

DD

DD1

DD1

SS

SS

EQ.2

Equilibrium Price increasesEquilibrium quantity increase

Supply remains the same Demand increase

Effect of change in supply on equilibrium price and quantity

When the supply for a good increases but its demand remains the same:Equilibrium quantity demanded and supplied increases

Equilibrium price will decrease..

When the supply for a good decreases but its demand remains the same:Equilibrium quantity demanded and supplied decreases

Equilibrium price will increase.

EQ.1

DD

SS

SS

Equilibrium Price decreasesEquilibrium quantity increase s

SS1

SS1

EQ.2

Demand remains the same Supply increase

Ques Review…• 1. Name the factors that influence the decision of a seller in fixing the

price of a commodity.• 2. If the cost of transportation increase what effect will it have on the

price?• 3. Excess demand is a situation where:

– a. Quantity demanded of a commodity is equal to its quantity supplied.– b. Quantity demanded is more than quantity supplied.– C. Quantity demanded is less than quantity supplied.4. Excess supply is a situation where :

a. Quantity supplied is equal to quantity demanded.b. Quantity supplied is more than quantity demanded.c. Quantity supplied is less than quantity demanded.

5. If at a given price quantity demanded is more than the quantity supplied:a. Price of the commodity starts falling.b Price of the commodity does not change.c. Price of the commodity starts rising.

• 6.If at a given price quantity supplied of a commodity is greater than its quantity demanded:

• a. Price of the commodity starts falling.• b Price of the commodity does not change.• c. Price of the commodity starts rising.• 7. What happens to the equilibrium price of a commodity when :• a. its demand increases and supply remains the same.• b. its supply increases and demand remains the same.• c. its demand decreases but supply remains same.• d. its supply decreases and demand remains the same.• 8. How is equilibrium quantity demanded and supplied affected when:• a. its demand increases and supply remains the same.• b. its supply increases and demand remains the same.• c. its demand decreases but supply remains same.• d. its supply decreases and demand remains the same.• 9. What happens to the price of a commodity when at a given price:• a. quantity demanded of a commodity is greater than its quantity supplied.• b. Quantity supplied of a commodity is greater than its quantity demanded.• c. quantity demanded is equal to its quantity supplied.

Market is a place

where buyers and sellers

to buy or sell goods.

come in contact with each other

directly or indirectly,

Features of a market.

1. Commodity : There has to be a commodity which is being demanded and sold

2. Buyers and sellers: There must be buyers and sellers of the commodity

3. Communication: There must be communication between the buyer and seller

Structure of Market• Nature of the Product• Depending upon number of sellers and buyers

in a market we have two types of market.• On this basis we have two types of market.• 1. Monopoly market.• 2. Perfectly competitive market.• Both these are extreme forms.

Structure of a marketMonopoly: ‘Monos’ means single and ‘Polus’ means seller, So monopoly means single seller.1.A single Firm : Monopoly is a market structure where we have a

single firm producing the goods.2.Price maker: The firm is the price maker. The seller is in a position

to charge high price.3.No close substitute: There is no close substitute of the commodity.4.No entry of new firm: It is not possible for a new firm to enter in the

market.5.Main Aim: The main aim is to maximise profit.6.Example : In India the government has monopoly in Atomic

Energy, Defence, Indian Railways etc.

Perfect Competition1. Large number of sellers and buyers.2. Homogeneous product: A single product is sold.

All sellers sell the same type of product.3. Free entry and Exit: Any firm can enter and exit the market.4. Every seller wants to earn maximum profit.5. To government provides protection bot does not interfere.6. The sellers and buyers have perfect knowledge about the product.7. Factors of production can move freely from one production unit to another.

Imperfect Competition• In the real world there is no monopoly or perfect competition.• Private monopoly is not allowed.• Only monopoly by the government exists.• Under Perfect competition only one type of product will be sold.• But in reality we have different brands of soaps available which differ

from one another in colour, size, fragrance.• Opposite to perfect competition ;

A market where there are many sellers selling different variations of a particular product.This type of market is called imperfect competition.

Classification of markets on basis of channel distribution

Wholesale markets Retails Markets

On the basis of channels of distribution of goods and services markets can be classified into1. Wholesale markets2. Retails markets.

Wholesale Market Retail Market 

1. Large quantities are sold here. 1. Small quantities are sold here. 

2. Prices are less. 2. Prices are more. 

3. This is the link between producer and retailer. 3. This is the link between wholesaler and final consumer.

4. This market is located in areas where transport and storage are easily reachable.

4. This market is located near residential areas.

Online MarketsIt’s a process by which consumers directly buy goods or services from a seller without an intermediary over the internet.

It is also know as electronic shopping.

You can uses your credit/debit cards or COD to make payments.

You can also make your electricity/ telephone/gas payments through the internet.

Role of Government

• Concept Review….

• We learnt that prices are determined by forces of demand and supply.

• But some times the price determined is very high and people cannot afford to buy at that price.

• Or sometimes the price is too low that sellers are not able to cover their cost of production at those prices.

• During such situations the government intervenes.• The government fixes prices which may be below the

Equilibrium price or at times above the equilibrium price to help consumers and producers.

Control Price

• 1) When demand for a commodity is more than supply, price increases.

• 2) When price increases, poor consumers are affected.

• 3) In order to help the poor consumers, government fixes the maximum price of the commodity.

• 4) This price is less than the equilibrium price and is called control price or ceiling price.

• 5) Thus, control price is fixed by the government to help the consumers.

This price is less than the equilibrium price and is called control price or ceiling price.

…control price is fixed by the government to help the consumers.

Support Price• 1) When supply for a commodity is more than demand ( mainly for agricultural

products), price falls.• 2) This fall in price affects farmers because they are not able to cover their

cost.• 3) In order to help the farmers, the government fixes the minimum price for

agricultural products.• 4) This price is more than the equilibrium price and is called support price.• 5) Thus support price is fixed by the government to help the

farmers/producers.

Token Price• 1) There are some essential services which the poor cannot

afford like hospital, school etc.• 2) The government provides these services at a price below the

per unit cost.• 3) This price is called token price.• 4) The purpose of token price is to ensure that no one misuses

these services.

Black Marketing

1) Control price is a low price fixed by the government which is less than the market price.

2) To make more profits, some sellers buy large quantities at this low price and keep stocks.

3) This makes supply less than demand.

4) The sellers then start selling their stocks at a high price which is illegal.

5) This is called black marketing.

6) The government checks black marketing by the system of dual pricing.

Dual Price• 1) Under dual price policy, a

commodity is sold at two different prices.

• 2) A part of the production is sold at the control price fixed by the government.

• 3) The remaining is sold at the market price which is determined by the market forces of demand and supply.

• 4) For example – Government sells wheat, sugar, rice etc. at control prices to poor people through ration shops. These commodities are also available at

D Mart at market prices.• 5) It helps the poor because

they are able to buy essential commodities at low prices.

Effect of taxes on Market Price

• Effect of taxes on market price• 1) Government collects sales tax from

producers or sellers.• 2) The seller has to cover this cost in his

price.• 3) Hence, he raises the market price.• 4) Therefore, tax leads to increase in

market price of a commodity.

Effect of Subsidies on Market Price• Effect of subsidy on market price• 1) Government gives concessions to producers of

certain essential commodities like kerosene, cooking gas etc.

• 2) Sometimes, government buys commodities from the sellers at market price and sells them at a lower price. This is called subsidy.

• 3) Thus essential commodities are available at prices below the market price.

• 4) Therefore, subsidy leads to fall in market price of the commodity.

Public Distribution System (PDS)

• PDS is public distribution system. • To take care of the poor people, government

purchases goods from sellers at market prices.• It sells these goods to the public at control

prices through fair price shops or ration shops.

Public Distribution System (PDS)

• Poor people cannot afford to buy the essential commodities at the market price.

• To help them the Public Distribution System was introduced.• Under this system they can get wheat, rice and other essential

commodities at cheaper prices.• The commodities are sold through an identification paper

called the Ration card.• The essential elements of the PDS are:

– Subsidy– Fixed quantity (Rationing)– Fair price shops (FPS)

The essential elements of public distribution system in India.

• 1) Subsidy – Prices of essential commodities are lower than the market price.

• 2) Fixed quantity – Government fixes quantity per head based on normal needs per person.

• 3) Fair price shops - This fixed quantity is made available through ration shops or fair price shops located in all parts of the country.

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