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How to Determine Product Price through Managerial Economics

Given the perfectly competitive firm is a price taker, price is determined through the interaction of supply and demand in the market. Markets always move toward equilibrium, so the market-determined price ultimately is the price that makes quantity demanded equal to quantity supplied.

The market demand curve for the good you produce is

image0.jpg

where Qd is the market quantity demanded and P is the market price in dollars.

The market supply curve is

image1.jpg

where Qs is the market quantity supplied and P is the market price in dollars.

In order to determine the equilibrium price, you take the following steps:

  1. Set quantity demanded equal to quantity supplied.

    image2.jpg
  2. Combine similar terms.

    image3.jpg
  3. Divide both sides of the equation by 35,000 to solve for P.

    image4.jpg

    Thus the market-determined equilibrium price is $80.00. This is the price your firm must charge in a perfectly competitive market.

    If you charge $80.01, nobody will buy your product because they can purchase it from any one of a large number of other firms for $80.00. And you don’t want to charge $79.99, because you can sell everything you produce for $80.00. You have no need to settle for a penny less.

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