Equilibrium with a fixed number of firms

With a fixed number of firms, the equilibrium is where the market demand curve and the market supply curve cross: (p∗, q∗).

• At a price below p∗, there is excess demand, which pushes the price up.
• At a price above p∗, there is excess supply, which pushes the price down.

Either way, the price moves towards p∗.

Solving with algebra: set demand equal to supply.

Example: qD = 300 − 2p and qS = 60 + 4p. Then 300 − 2p = 60 + 4p, so 6p = 240, and p∗ = ₹40. The equilibrium quantity is q∗ = 300 − 80 = 220.

Excess demand at any price is ED(p) = qD − qS = 240 − 6p. It is positive when p is below 40 (a shortage), and negative above 40, where there is excess supply instead.