Process of Price Determination Under Perfect Competition

The process of price determination under perfect competition is driven by the interaction of demand and supply in the market. In a perfectly competitive market, there are numerous buyers and sellers, homogeneous products, perfect information, and free entry and exit of firms. This leads to a situation where no individual buyer or seller has the power to influence the market price.

Supply Schedule:

The supply schedule represents the relationship between the quantity of a product supplied by producers and the corresponding prices at which they are willing to sell. The supply schedule is typically upward sloping, indicating that as the price of the product increases, producers are willing to supply more of it.

For example, let's consider the supply schedule for wheat:

Price per bushel (in $) | Quantity supplied (in bushels)
--------------------------------------------------------
5 | 100
10 | 200
15 | 300
20 | 400
25 | 500

In the above schedule, as the price of wheat increases from $5 to $25, the quantity supplied increases from 100 bushels to 500 bushels.

Demand Schedule:

The demand schedule represents the relationship between the quantity of a product demanded by buyers and the corresponding prices at which they are willing to purchase. The demand schedule is typically downward sloping, indicating that as the price of the product decreases, buyers are willing to purchase more of it.

Let's consider the demand schedule for wheat:

Price per bushel (in $) | Quantity demanded (in bushels)
--------------------------------------------------------
25 | 100
20 | 200
15 | 300
10 | 400
5 | 500

In the above schedule, as the price of wheat decreases from $25 to $5, the quantity demanded increases from 100 bushels to 500 bushels.

Equilibrium Price and Quantity:

The equilibrium price and quantity are determined at the intersection of the demand and supply curves. It is the price and quantity at which the quantity demanded equals the quantity supplied.

Equilibrium is reached when the market clears, i.e., there is no excess demand or excess supply. At any price above the equilibrium price, there will be excess supply, and at any price below the equilibrium price, there will be excess demand.

In the diagram below, the demand curve (D) and supply curve (S) intersect at point E, determining the equilibrium price (P*) and equilibrium quantity (Q*) of wheat.

[Diagram]

At the equilibrium price, the quantity demanded by buyers is equal to the quantity supplied by producers. Any deviation from this equilibrium price will result in market forces pushing the price back towards the equilibrium.

Conclusion:

The process of price determination under perfect competition involves the interaction of demand and supply. The supply schedule represents the quantity of a product supplied at different prices, while the demand schedule represents the quantity demanded at different prices. The equilibrium price and quantity are determined at the intersection of the demand and supply curves, where there is no excess demand or supply. This process ensures that the market operates efficiently and allocates resources effectively.