The market for a good is in equilibrium. What is the effect on equilibrium price and quantity if the increase in the market demand is greater than an increase in market supply?
The market for a good is in equilibrium. What is the effect on equilibrium price and quantity if the increase in the market demand is greater than an increase in market supply?
When an increase in market demand is greater than the increase in market supply, there will be excess demand. This will result in competition among the buyers. Prices will go up. This will result in an increase in quantity supplied and fall in quantity demanded. These changes continue till price rises to a level at which demand and supply are equal again. So, in this case, the equilibrium price and equilibrium quantity both will rise. The diagram illustrates the point.
In the diagram, increase in DD=AE while the increase in supply is less, i.e., EB. Therefore, equilibrium price and quantity rises from OP to OP1 and OQ and OQ1.
When an increase in market demand is greater than the increase in market supply, there will be excess demand. This will result in competition among the buyers. Prices will go up. This will result in an increase in quantity supplied and fall in quantity demanded. These changes continue till price rises to a level at which demand and supply are equal again. So, in this case, the equilibrium price and equilibrium quantity both will rise. The diagram illustrates the point.
In the diagram, increase in DD=AE while the increase in supply is less, i.e., EB. Therefore, equilibrium price and quantity rises from OP to OP1 and OQ and OQ1.
