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Note all diagrams were drawn by hand However there is nothing complex only very simply supply and demand diagrams with straight lines to indicate supply and demand which you can imagine yourself very easily Prices are set as a result of the price mechanism The price for a good is the price at which the quantity of the good demanded is the same as the quantity of good supplied this is the equilibrium price ceteris paribus for any given supply and demand curve for a certain good or service This occurs when there is perfect competition in a perfectly competitive market This is where the market is large enough so that no one individual firm or individual has any appreciable influence on the price of the commodity In monopolistic or oligopolistic competition this may not be the case and the price of the good may be determined largely through the actions of one or several important firms or individuals Given the conditions stated above we can show where the price of a good is obtained diagrammatically To observe what happens when the price is set at a non-equilibrium level price we can use the two diagrams below In diagram 1 the price for a commodity is above the equilibrium price and in diagram 2 it is below it We can see that in diagram 1 there is excess supply more goods or services are supplied than demanded Thus there is increased competition between supplies that need to lower their prices to sell their goods Thus the price lowers until it reaches the equilibrium price In diagram 2 more goods or services are demanded than are supplied Thus firms can raise their prices as people are prepared to pay more to ensure that they get the good Excess demand thus pushes the price up
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