How the price of a product will be determined by the forces of demand and supply in the market. On the demand side, we know that consumers buy more of a good at a lower price. And less of it when the price rises. But as far as supply is concerned the situation is exactly opposite. A seller will supply more when price is high and less when price is low. This is so because while a consumer wants to maximize his satisfaction, and hence likes to pay the least possible price, a producer or a seller wants to maximize his profits by the product by trying to extract the maximum possible price. The actual market price will have to be somewhere between the minimum and the maximum limits. When the price of the product is low, demand of the consumer will be high, but the sellers will not be prepared to supply as much.
Conversely, when the price is high, suppliers would like to sell more but the consumer would like to buy less of the product. Thus are some prices (low) when demand will be greater than supply and other prices (high) when supply will be greater than demand. Between these two situations, there will be a price where the consumers will demand just as much as the sellers are prepared to supply. At this price therefore, the demand for and the supply of the product will be equal.
The market price is determined at a level where demand for and supply of a good are equal to each other. This is known as the situation of equilibrium between demand and supply and the price prevailing in the situation is called the equilibrium price. Equilibrium is a state in which forces making for change in opposite directions are perfectly in balance, so that there is no tendency to change. When the market achieves this equilibrium in the manner explained above, the quantity of the product which buyers want to buy at the prevailing price is exactly matched by the quantities which the sellers wish to sell. If this were not so, the price of the product would keep changing, as buyers will try to buy more of the goods than is available, or the sellers will try to sell more than the consumers are prepared to accept at the prevailing price.
Equilibrium is thus a state of rest for the opposing forces of demand and supply. Any deviation from the equilibrium price to each other again and the original price is restored. Any change from the equilibrium position will, therefore, necessarily be temporary in nature.
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