Explain the effects of an increase in both demand and supply of a commodity on its equilibrium price.
Explain the effects of an increase in both demand and supply of a commodity on its equilibrium price.
When both demand and supply of a commodity increase (i.e., when both the demand and supply curves of a commodity shift to the right), the equilibrium quantity will increase but the equilibrium price may or may not be affected. There may be three situations:
(i) When both demand and supply of a commodity increase in equal proportions, the equilibrium price will remain the same. See Fig. (a).
(ii) When both demand and supply increase, but the increase in demand is more than the increase in supply, equilibrium price will rise. See Fig. (b).
(iii) When both demand and supply increase, but the increase in demand is less than the increase in supply, equilibrium price will fall. See Fg. (c).
The following diagrams illustrate these three cases:
When both demand and supply of a commodity increase (i.e., when both the demand and supply curves of a commodity shift to the right), the equilibrium quantity will increase but the equilibrium price may or may not be affected. There may be three situations:
(i) When both demand and supply of a commodity increase in equal proportions, the equilibrium price will remain the same. See Fig. (a).
(ii) When both demand and supply increase, but the increase in demand is more than the increase in supply, equilibrium price will rise. See Fig. (b).
(iii) When both demand and supply increase, but the increase in demand is less than the increase in supply, equilibrium price will fall. See Fg. (c).
The following diagrams illustrate these three cases:
