Illustration

# Illustration - intersect at point E which is an equilibrium...

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Illustration Let’s present and illustrate the establishment of equilibrium with the help of demand and supply functions in our earlier examples (in the sections given above). We begin with two equations: q d = 10 - 3P and q s = 2P By definition, demand and supply must be equal (q d = q s ) for the condition of equilibrium. q d = 10 - 3P = q s = 2 P or 10 - 3P = 2P On solving this we find equilibrium price: On substituting the value of price in demand and supply function we get, qd = 10 - 3P qd = 10 - 3 (2) = 10 - 6 = 4 qs = 2P qs = 2 (2) = 4 Hence equilibrium price is 2, at which both quantity demanded and supplied are equal to 4. The algebraic proof (Figure 7) of the equilibrium can also be presented geometrically. Figure 9

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In the figure, AB and OS are the demand and supply curves respectively. The two curves
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Unformatted text preview: intersect at point E which is an equilibrium point at which price P = 2 and quantity demanded and supplied are both equal (q = 4). At any other price higher than P such as P 1 , the quantity supplied S 1 exceeds the quantity demanded d 1 (S 1 > d 1 ) and hence at this stage, some sellers remain dissatisfied. On the other hand at any lower price such as P 2 , quantity demanded d 2 exceeds quantity supplied S 1 (d 2 > S 1 ) and this time some buyers remain dissatisfied. Therefore only at the point of intersection between demand and supply curves can equilibrium be attained. In other words, equilibrium price represents that price at which buyers are willing to buy the good and sellers are willing to sell it. This is the point of satisfaction for both the groups....
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Illustration - intersect at point E which is an equilibrium...

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