Question

Market for a commodity is in equilibrium . Demand for the commodity ' increases '. Explain the chain effects of this change till market again reaches equilibrium

Answer 1

An increase in the demand for the commodity leads to an increase in the equilibrium price and quantity.

Here,

D1D1 and S1S1 represent the market demand and market supply respectively. The initial equilibrium occurs at E1, where the demand and the supply intersect each other. Due to the increase in the demand for the commodity, the demand curve will shift rightward parallel fromD1D1 to D2D2, while the supply curve will remain unchanged. Hence, there will be a situation of excess demand, equivalent to (q1' − q1). Consequently, the price will rise due to excess demand. The price will continue to rise until it reaches E2 (new equilibrium), where D2D2 intersects the supply curve S1S1. The equilibrium price increases from P1 to P2 and the equilibrium output increases from q1 to q2.

Answer 2

Explanation:

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