Question

Explain, in general, the forces that determine the equilibrium relative commodity price at which trade takes place.

Answer 1

When a commodity trades in any market place, the forces of demand and supply help in deciding an equilibrium price of the product being sold.

Both the suppliers and the buyers are willing to buy or sell the product at an optimum quantity. An equilibrium is said to happen when the interest of both the buyers and sellers are met.

Demand in general refers to the quantity which buyers are willing to purchase whereas supply refers to the price the sellers are ready to sell. An equilibrium is said to happen when demand and supply curves meet each other.

The following is an equilibrium Diagram:-

Supply Quantity Equilibrium Price Demand Price

There are two axis on the graph namely price and Quantity and two different graphs for demand and supply. We can see here that as price increases i.e shifts to the right, demand decreases and supply increases. The equilibrium price is one where demand and supply meet.

Thus, it is correct to say, that in general the forces that determine equilibrium of price are demand and supply of the commodity. At this price trade normally takes place. Anything lesser is a loss to the supplier and anything more is a loss to the buyer.

Please feel free to ask your doubts in the comments section if any.