In a competitive market, how do supply and demand interact to determine the equilibrium price and quantity?

• A. They are determined where the demand curve is vertical, because consumers then accept any price set by firms.
• B. They are determined where the quantity supplied is greater than the quantity demanded; firms then raise prices until the surplus disappears.
• C. They are determined where the quantity demanded equals the quantity supplied; at that price there is no tendency for price to change.
• D. They are determined by the highest price consumers are willing to pay, regardless of firms’ costs or willingness to supply.

Answer: (C)

Verified step by step guidance

1. Understand that in a competitive market, the equilibrium price and quantity are found where the market clears, meaning there is no excess supply or demand.
2. Identify the demand curve, which shows the relationship between price and quantity demanded by consumers, typically downward sloping.
3. Identify the supply curve, which shows the relationship between price and quantity supplied by firms, typically upward sloping.
4. Set the quantity demanded equal to the quantity supplied to find the equilibrium condition: \(\text{Quantity Demanded} = \text{Quantity Supplied}\).
5. Solve the equation from step 4 for the price variable to find the equilibrium price, then substitute back to find the equilibrium quantity.