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Market Equilibrium

Question
CBSEENEC12013519

Market for a good is in equilibrium. There is simultaneous decrease both in demand and supply of the good. Explain its effect on market price.

Solution

The simultaneous decrease in demand and supply affects the equilibrium price and output depending on the magnitude of the change in demand and supply. The simultaneous decrease in the demand and supply can be bifurcated into the following three conditions.
i. When Demand and Supply Decrease in the Same Proportion

Let S1 and D1 be the initial supply curve and the initial demand curve respectively. The initial equilibrium is at point E1, with equilibrium price at P1 and equilibrium output Q1.
Suppose that both demand and supply decrease by the same proportion. Consequently, the demand curve shifts to D2 and the supply curve shifts to S2. The new equilibrium is at point at E2 with lower equilibrium output Q2 but the same equilibrium price P1. Thus, when both demand and supply decrease in the same proportion, the equilibrium price remains the same, but the equilibrium quantity falls.
ii. When Demand Decreases more than the Decrease in Supply

Let D1 and S1 be the initial demand curve and the initial supply curve, respectively. The initial equilibrium is at point E1 with equilibrium price P1 and equilibrium output Q1.

Now let us suppose that demand decrease to D2 and supply decreases by lesser proportion to S2. Consequently, the new equilibrium is established at point E2. At the new equilibrium, the equilibrium price falls to P2 and equilibrium output falls to Q2. Thus, when decrease in demand is more than the decrease in supply, the equilibrium price falls accompanied by the fall in equilibrium output.
iii. When Decrease in Demand is lesser than Decrease in Supply.

Let the initial equilibrium be at point E1, determined by the intersection of the initial demand curve D1 and the initial supply curve S1. The equilibrium price is P1 and the equilibrium output is Q1.
Now suppose that the demand decreases but lesser than the decrease in the supply. The demand curve shifts to D2 while the supply curve shifts to S2. The new equilibrium determined by the intersection of D2 and S2 is at point E2, where the equilibrium price increases to P2 and the equilibrium quantity falls to Q2. Thus, when decrease in demand is lesser than the decrease in supply then the equilibrium price rises and equilibrium output falls to Q2.



 

Some More Questions From Market Equilibrium Chapter

What is minimum price ceiling? Explain its implications.

If the prevailing market price is above the equilibrium price, explain its chain of effects.

The demand of a commodity when measured through the expenditure approach is inelastic. A fall in its price will result in :
(choose the correct alternative)
(a) no change in expenditure on it.
(b) increase in expenditure on it.
(c) decrease in expenditure on it.
(d) any one of the above

As we move along a downward sloping straight line demand curve from left to right, price elasticity of demand : (choose the correct alternative)
(a) remains unchanged
(b) goes on falling
(c) goes on rising
(d) falls initially then rises

Define market demand.

Show that demand of a commodity is inversely related to its price.
Explain with the help of utility analysis.

Or

Why is an indifference curve negatively sloped? Explain.

When price of a commodity X falls by 10 per cent, its demand rises from 150 units to 180 units. Calculate its price elasticity of demand. How much should be the percentage fall in its price so that its demand rises from 150 to 210 units ?

Complete the following table :

output units  total cost average variable cost marginal cost average fixed cost
0 30       
1     20  
2 68      
3 84 18    
4     18  
5 125 19   6

Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this change in the market of X.
Or
Explain the chain of effects of excess supply of a good on its equilibrium price.

A price at which a consumer is willing to buy and a seller is willing to sell the commodity is called.