How are Prices Determined in the Market?



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Prices are determined by the forces of Demand and Supply.

The price which equates quantity demanded to quantity supplied is called equilibrium price. At this price, there is no tendency to change and buyers and sellers are both equally satisfied. At a price lower than the equilibrium price, quantity demanded exceeds quantity supplied, hence creating a shortage. Whereas, at a price above the equilibrium price, quantity supplied exceeds quantity demanded, hence creating a surplus. Therefore, any price below or above the equilibrium price is neither desirable nor sustainable, since there is a natural tendency to change (toward the equilibrium price). This is illustrated in the video below: 

http://www.youtube.com/watch?v=W5nHpAn6FvQ

Reference:

• Episode 14- Market Equilibrium                                                                                   http://www.youtube.com/watch?v=W5nHpAn6FvQ