The market of a commodity is in equilibrium. Demand for the commodity increases. Explain the chain of effects of this change till the market reaches equilibrium once again.
The market of a commodity is in equilibrium. Demand for the commodity increases. Explain the chain of effects of this change till the market reaches equilibrium once again.
Effect of an increase in demand for a commodity on equilibrium price and the equilibrium quantity is discussed with reference to the figure given below:
In Fig. D1 is the initial demand curve and S is the initial supply curve. E is the initial equilibrium where supply and demand curves intersect each other. OO, is the equilibrium quantity and OP is the equilibrium price. Due to increase in demand, the demand curve shifts to the right from, D1 to D2. As an immediate impact of an increase in demand, there is excess demand equal to EF (at the existing price). Due to the pressure of demand, the price of the commodity tends to be higher than the equilibrium price. The rise in price leads to an expansion of supply and contraction of demand. Expansion of supply occurs from point E towards point K. Contraction of demand occurs from point F towards point K. The process of expansion of supply and contraction of demand continues until excess demand is fully eliminated. K is the point of new equilibrium, where the market clears itself once again. Corresponding to the new equilibrium, equilibrium price increases from OP1 to OP2 and equilibrium quantity increases from OQ1 to OQ2.
Effect of an increase in demand for a commodity on equilibrium price and the equilibrium quantity is discussed with reference to the figure given below:
In Fig. D1 is the initial demand curve and S is the initial supply curve. E is the initial equilibrium where supply and demand curves intersect each other. OO, is the equilibrium quantity and OP is the equilibrium price. Due to increase in demand, the demand curve shifts to the right from, D1 to D2. As an immediate impact of an increase in demand, there is excess demand equal to EF (at the existing price). Due to the pressure of demand, the price of the commodity tends to be higher than the equilibrium price. The rise in price leads to an expansion of supply and contraction of demand. Expansion of supply occurs from point E towards point K. Contraction of demand occurs from point F towards point K. The process of expansion of supply and contraction of demand continues until excess demand is fully eliminated. K is the point of new equilibrium, where the market clears itself once again. Corresponding to the new equilibrium, equilibrium price increases from OP1 to OP2 and equilibrium quantity increases from OQ1 to OQ2.
