Question

Draw a diagram showing the new equilibrium price is decreasing with simultaneous fall in demand and supply .Also state the reason responsible for this situation.​

Answer 1

Answer:

then compare the original equilibrium price and quantity to the new equilibrium price and quantity.

Changes in equilibrium price and quantity: the four-step process

Let's start thinking about changes in equilibrium price and quantity by imagining a single event has happened. It might be an event that affects demand—like a change in income, population, tastes, prices of substitutes or complements, or expectations about future prices. Or, it might be an event that affects supply—like a change in natural conditions, input prices, technology, or government policies that affect production.

How do we know how an economic event will affect equilibrium price and quantity? Luckily, there's a four-step process that can help us figure it out!

Step 1. Draw a demand and supply model representing the situation before the economic event took place.

Establishing this model requires four standard pieces of information:

A downward sloping demand curve

An upward sloping supply curve

Correctly labeled axes: a vertical axis labeled price and a horizontal axis labeled quantity

An initial equilibrium price and quantity. It is a good practice to indicate these on the axes, rather than in the interior of the graph.

Step 2. Decide whether the economic event being analyzed affects demand or supply.

In other words, does the event refer to something in the list of demand factors or supply factors?

Step 3. Decide whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram.

You can think about it this way: Does the event change the amount consumers want to buy or the amount producers want to sell?

Step 4. Identify the new equilibrium and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.

The best way to get at this process is to try it out a couple of times! Let’s first consider an example that involves a shift in supply, then we'll move on to one that involves a shift in demand. Finally, we'll consider an example where both supply and demand shift.