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Price of commodity is determined by demand and supply.

Demand and supply are like two forces pulling in opposite direction that is, at lower pricemore quantity is demanded but less will be supplied.Conversely at higher prices less quantity is demanded but more will be supplied.The equilibrium of supply and demand in a competitive market is attained at a price in which forces of supply and demand are in balance.

images_2_copy Demand Vs Supply Curve

The price at which quantity demanded equals quantity supplied is called equillibrium price.If the price is above or below the equilibrium price the forces of demand and supply will interact.

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For instance at a higher price 40,the market demand is 200 while the market supply is 400.Supply is more than demand.Now there is more competition among sellers to sell.So they will reduce price to attract buyers.As the price falls demand will rise and supply will fall and both are in balance.On the other hand at a lower price of 20,demand is more than supply.

Now competition among buyers to buy more will push the price up till equilibrium price is reached.

Thus the interaction between the forces of supply and demand determines the price of a commodity.


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