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∗ D ∗ S ∗ where p denotes the equilibrium price and q (p ) and q (p ) denote the market demand and market supply of the commodity respectively at price p . ∗ If at a price, market supply is greater than market demand, we say that there is an excess supply in the market at that price and if market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price. Therefore, equilibrium in a perfectly competitive market can be defined alternatively as zero excess demand-zero excess supply situation. Whenever market supply is not equal to market demand, and hence the market is not in equilibrium, there will be a tendency for the price to change. In the next two sections, we will try to understand what drives this change. Out-of-equilibrium Behaviour From the time of Adam Smith (1723-1790), it has been maintained that in a perfectly competitive market an ‘Invisible Hand’ is at play which changes price whenever there is imbalance in the market. Our intuition also tells us that this ‘Invisible Hand’ should raise the prices in case of ‘excess demand’ and lower the prices in case of ‘excess supply’. Throughout our analysis we shall maintain that the ‘Invisible Hand’ plays this very important role. Moreover, we shall take it that the ‘Invisible Hand’ by following this process is able to reach the equilibrium. This assumption will be taken to hold in all that we discuss in the text. 5.1.1 Market Equilibrium: Fixed Number of Firms Recall that in Chapter 2 we have derived the market demand curve for price- taking consumers, and for price-taking firms the market supply curve was derived in Chapter 4 under the assumption of a fixed number of firms. In this section with the help of these two curves we will look at how supply and demand forces work together to determine where the market will be in equilibrium when the number of firms is fixed. We will also study how the equilibrium price and 72 quantity change due to shifts in demand and supply curves. i Figure5.1illustratesequilibrium o for a perfectly competitive market o with a fixed number of firms. Here Price o i SS denotes the market supply M curve and DD denotes the market r demand curve for a commodity. SS c o The market supply curve SS p2 t shows how much of the I commodity, firms would wish to p* supply at different prices, and the p demand curve DD tells us how 1 DD much of the commodity, the consumers would be willing to O q1 q2 q* q2 q1 Quantity purchase at different prices. Fig. 5.1 Graphically, an equilibrium is a Market Equilibrium with Fixed Number of point where the market supply Firms. Equilibrium occurs at the intersection of the curve intersects the market demand curve because this is market demand curve DD and market supply curve SS.Theequilibriumquantityisq*andtheequilibrium where the market demand equals price is p*. At a price greater than p*, there will be market supply. At any other point, excess supply, and at a price below p*, there will be either there is excess supply or excess demand. Reprint 2026-27