The market for a good is in equilibrium. There is an increase in demand for this good. Explain the chain of effects that will result from this.

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Solution

Equilibrium refers to the situation in which market demand is equal to market supply. The given diagram shows a situation of an increase in demand. The demand curve shifts to the right, from DD to $D_{1} D_{1}$ . Equilibrium point shifts from E to $E_{1}$ . Consequently, the equilibrium price rises from OP to $O P_{1}$ , and equilibrium quantity increases from OQ to $O Q_{1}$ .

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