So far, we have discussed the demand and supply of the commodities. The main purpose of understanding the demand and the supply is to find out the point of market equilibrium.
Consider the following diagram:
a. Market equilibrium is the point at which the quantity willingly offered for sale by the sellers at the given price is just equal to the quantity demanded by the buyers at the same price.
b. In the above figure at the price P*, the quantity demanded equals the quantity supplied, i.e. Q*.
c. If the price is above this level it would mean that the quantity demanded is less than the quantity supplied. Thus, there will be an excess supply. In order to meet the demand, the supplier would have to reduce the price until it meets the demand. Thus, the price will fall until it reaches P* (where the quantity demanded equals the quantity supplied), and the market will attain equilibrium.
d. If, however, the price is below the equilibrium level, it would mean that the amount that the seller is willing to supply is less than the quantity demanded. Thus, the prices will rise until they reach equilibrium.
e. Thus, the demand and supply forces make the market attain equilibrium in the long-run.