If the demand for a commodity increases and the supply decreases, what will be the effect on equilibrium price and quantity? Illustrate with diagrams.
If the demand for a commodity increases and the supply decreases, what will be the effect on equilibrium price and quantity? Illustrate with diagrams.
When demand for a commodity increases and supply decreases ( i.e., when demand curve shifts to the right and supply curve shifts to the left), the equilibrium price will always increase but the equilibrium quantity may or may not be affected. There may be three situations:
(i) When the increase in demand is more than the decrease in supply, both equilibrium price and quantity will rise. See Fig. (a).
(ii) When the increase in demand is equal to a decrease in supply, then the equilibrium price will rise but the quantity remains the same. See Fig. (b).
(iii) When the increase in demand is less than the decrease in supply, then the equilibrium price will rise but quantity will fall. See Fig. (c).
When demand for a commodity increases and supply decreases ( i.e., when demand curve shifts to the right and supply curve shifts to the left), the equilibrium price will always increase but the equilibrium quantity may or may not be affected. There may be three situations:
(i) When the increase in demand is more than the decrease in supply, both equilibrium price and quantity will rise. See Fig. (a).
(ii) When the increase in demand is equal to a decrease in supply, then the equilibrium price will rise but the quantity remains the same. See Fig. (b).
(iii) When the increase in demand is less than the decrease in supply, then the equilibrium price will rise but quantity will fall. See Fig. (c).
