In a competitive market, how is the equilibrium price and quantity determined?

• A. By the interaction between buyers and sellers where quantity demanded equals quantity supplied
• B. By consumers alone choosing the price they are willing to pay
• C. By producers alone deciding the price and quantity
• D. By government intervention setting price controls

Answer: (A)

Verified step by step guidance

1. Understand that in a competitive market, the equilibrium price and quantity are determined where the quantity demanded by consumers equals the quantity supplied by producers.
2. Write down the demand function, which shows the relationship between price and quantity demanded, typically in the form \(Q_d = f(P)\), where \(Q_d\) is quantity demanded and \(P\) is price.
3. Write down the supply function, which shows the relationship between price and quantity supplied, typically in the form \(Q_s = g(P)\), where \(Q_s\) is quantity supplied and \(P\) is price.
4. Set the quantity demanded equal to the quantity supplied to find the equilibrium condition: \(Q_d = Q_s\).
5. Solve the equation \(f(P) = g(P)\) for the price \(P\) to find the equilibrium price, then substitute this price back into either the demand or supply function to find the equilibrium quantity.