Market for a good is in equilibrium supply of a good decreases explain the chain of effects
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Effect of a decrease in supply of a commodity on its equilibrium price and equilibrium quantity is discussed with reference to Fig. given .
In Fig. S1S1 is the initial supply curve, crossing demand curve DD at point E which is the point of initial equilibrium. Now, owing to a decrease in supply, supply curve shifts to the left, from S1 S1 to S2S2. As an immediate impact of decrease in supply, there is excess demand, equal to EF (at the existing price). Because of this excess demand (and sluggish supply), price of the commodity tends to be higher than the equilibrium price. Owing to rising price, quantity demanded tends to contract. Contraction of demand occurs from point E towards point K. But due to rising price, quantity supplied tends to extend. The extension of supply occurs from point F towards point K. The process of extension of supply and contraction of demand (triggered by the rising price) continues till the excess demand is fully tackled. K is the point of new equilibrium where the market clears itself once again. Corresponding to the new equilibrium, quantity demanded is equal to the quantity supplied, i.e., OQ2 and, equilibrium price is OP2.
Thus, the net effect of decrease in supply is:
(i) equilibrium price increases from OP1 to OP2 and
(ii) equilibrium quantity decreases from OQ1 to OQ2.
In Fig. S1S1 is the initial supply curve, crossing demand curve DD at point E which is the point of initial equilibrium. Now, owing to a decrease in supply, supply curve shifts to the left, from S1 S1 to S2S2. As an immediate impact of decrease in supply, there is excess demand, equal to EF (at the existing price). Because of this excess demand (and sluggish supply), price of the commodity tends to be higher than the equilibrium price. Owing to rising price, quantity demanded tends to contract. Contraction of demand occurs from point E towards point K. But due to rising price, quantity supplied tends to extend. The extension of supply occurs from point F towards point K. The process of extension of supply and contraction of demand (triggered by the rising price) continues till the excess demand is fully tackled. K is the point of new equilibrium where the market clears itself once again. Corresponding to the new equilibrium, quantity demanded is equal to the quantity supplied, i.e., OQ2 and, equilibrium price is OP2.
Thus, the net effect of decrease in supply is:
(i) equilibrium price increases from OP1 to OP2 and
(ii) equilibrium quantity decreases from OQ1 to OQ2.
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