Price determination under Perfect Competition

Price determination under Perfect Competition: 
The interaction of demand and supply determine price of the commodity in perfect competition. This is known as ‘equilibrium price.’ Marshall has compared the process of price determination to the cutting of cloth with a pair of scissors. Just as both the blades of scissors are required to cut the cloth, both the forces of demand and supply are essential to determine the equilibrium price in the market. This is explained with the help of the following schedule and diagram.

From the table, following conclusions can be drawn :
1) When price rises from ₹100 to ₹200 quantity demanded falls from 5000 kgs. to 4000 kgs. whereas supply increases from 
1000 kgs. to 2000 kgs. This is because demand falls with rise in price and supply rises with a rise in price. This is the stage 
where demand is greater than supply (DD > SS). 
2) When price rises to ₹300, quantity demanded and quantity supplied become equal that is 3000 kg. This is the stage of 
equilibrium where demand and supply become equal (DD = SS). Hence, ₹300 becomes the equilibrium price.
3) When price further rises from ₹ 400 to ₹500, demand falls from 2000 kgs. to 1000 kgs. and supply rises from 4000 kgs. to 5000 kgs. Thus, supply is greater than demand. (SS > DD). The process of price determination is explained in the following figure. In this diagram, X axis represents quantity demanded and quantity supplied, whereas Y axis represents the price. DD is the downward sloping demand curve which shows inverse relationship between price and quantity demanded. SS is the upward sloping supply curve which shows direct relationship between price and quantity supplied. E is the equilibrium point where DD and SS curve intersect each other. Accordingly ₹300 is the equilibrium price and 3000 kgs. is the equilibrium quantity demanded and supplied. This equilibrium price is determined by market demand and market supply.