How is price determined in a competitive market?

In a competitive market, price is determined by the forces of supply and demand.

In more detail, a competitive market is characterised by a large number of buyers and sellers, each with little to no influence over the market price. This is often referred to as 'price takers'. The price in such a market is determined by the interaction of supply and demand.

On the demand side, consumers decide how much of a good or service they are willing and able to buy at different prices. Generally, the higher the price, the less quantity demanded, and vice versa. This relationship is depicted by a downward sloping demand curve on a graph.

On the supply side, producers decide how much of a good or service they are willing and able to sell at different prices. Unlike demand, the relationship between price and quantity supplied is direct - the higher the price, the more quantity supplied, and vice versa. This is represented by an upward sloping supply curve.

The point where the supply and demand curves intersect is called the equilibrium. At this point, the quantity demanded equals the quantity supplied. The price corresponding to this point is the equilibrium price, or the market-clearing price. This is the price that prevails in a competitive market.

However, it's important to note that this price isn't static. Any changes in the conditions of demand or supply will shift the respective curves, leading to a new equilibrium price. For instance, if there's an increase in consumer income leading to higher demand for a product, the demand curve will shift to the right. This will result in a higher equilibrium price. Similarly, if there's a technological advancement that reduces the cost of production, the supply curve will shift to the right, leading to a lower equilibrium price.

In conclusion, the price in a competitive market is determined by the forces of supply and demand. It's the price at which the quantity demanded equals the quantity supplied. Any changes in these forces will lead to a new equilibrium price.