UNIT 6
PRICE DETERMINATION
Introduction
Price determination is concerned with how prices of good are determined through the interaction of demand and supply, auction sales and bargaining. The price of a commodity or service is the monetary value put on a commodity or service. It is seen as the exchange value of goods and services in monetary terms. Price is therefore the money value of goods and services. Under this topic we are going to assume a perfect or free market situation. To ensure easy understanding the following terms relating to price determination are explained.
1. Market: A market may be defined as any systematic arrangement or mechanism which brings buyers and sellers of a particular commodity into contact for exchange to take place. In economics, we can identify five different types of markets. These are the goods market, money market, labour market, foreign exchange market and capital and bond market.
2. Equilibrium: In general equilibrium is defined as the state of balance or rest from which there is no tendency for change. In economics, equilibrium normally refers to equilibrium in a market. It occurs where supply meets demand. In this situation, there is neither surplus nor shortage of goods in the market
3. Disequilibrium: It occurs whenever the quantity demanded and supplied are not equal at a certain price. This will bring about excess supply or excess demand in the market
4. Equilibrium price: This is the price at which the quantity consumers are willing and able to buy is identical with the amount sellers are willing and able to supply in the market. That is quantity demanded is equal to quantity supplied so that there is neither excess demand nor excess supply. Equilibrium price exists when there is no pressure on price to change. It is also termed as the market-clearing price.
5. Equilibrium quantity: It is the quantity at which the demand is equal to supply and there is neither shortage nor surplus.
6. Excess demand (shortage): This is where quantity demanded exceeds quantity supplied. It is seen as the situation where there is the need for more goods to meet consumer’s desires but these goods are not available. Excess demand comes about when the price is below the equilibrium, that is, quantity supplied falls below quantity demanded.
Thus, excess demand = 
7. Excess supply (surplus): This arises when quantity supplied exceeds quantity demanded. It is a situation where there are more goods offered by the supplier than what consumers desire for their satisfaction. Excess supply comes about when price is above equilibrium price so that quantity supplied increases while quantity demanded falls.
Thus, excess supply = 
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