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Question
A market for a good is in equilibrium. The supply of good "decreases". Explain the chain of effects of this change
Solution
Consider DD to be the initial demand curve and SS to be the supply curve of the market. Market equilibrium is achieved at Point E, where the demand and supply curves intersect each other. Therefore, the equilibrium price is OP, and the equilibrium quantity demanded is OQ.
When there is a change in factors other than price, there will be a decrease in the supply of goods. There will be a shift in the supply curve towards the left to SS1 with a decrease in the supply, and the demand curve DD will remain the same. This implies that there will be a situation of excess demand at the equilibrium point as shown in the below diagram
This excess demand increases the competition among buyers, and they will pay a higher price to obtain more goods. So, the price will tend to increase till it reaches to OP1 and the total quantity will fall to OQ1. Now, the new market equilibrium will be at Point E1, where the new supply curve SS1 intersects the demand curve DD.
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(ii) below the equilibrium price?
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Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as
qSf = 8 + 3p for p ≥ 20
= 0 for 0 ≤ p < 20
(a) What is the significance of p = 20?
(b) At what price will the market for X be in equilibrium? State the reason for your answer.
(c) Calculate the equilibrium quantity and number of firms.
Answer the following question.
Show with the help of diagrams, the effect on equilibrium price and quantity when:
There is a fall in the price of substitute goods.
Answer the following question.
Show with the help of diagrams, the effect on equilibrium price and quantity when:
There is a rise in the prices of inputs.
