Question

Explain diagrammatically how equilibrium price and equilibrium quantity are affected by changes in the demand for a commodity, with the supply remaining constant.

Answer 1

If supply remains constant, the shift of the demand curves, i.e., a change in demand, will result in a change in equilibrium price and equilibrium quantity. The effect of a shift in the demand curve on the equilibrium price and quantity can be illustrated with the help of the given Fig.

Case 1: Increase in Demand (Rightward Shift of Demand Curve)

• The original demand and supply curves intersect at point E₀, giving the equilibrium price OP and quantity OQ₀.
• When demand increases, the demand curve shifts to the right (from D₀D₀ to D₁D₁).
• At the old price OP, demand now exceeds supply, creating excess demand.
• This pushes the price upward.
• A new equilibrium is formed at point E₁, where the new demand curve D₁D₁ intersects the same supply curve.
• The new equilibrium price rises to OP₁, and quantity increases to OQ₁.

Case 2: Decrease in Demand (Leftward Shift of Demand Curve)

• Demand curve shifts leftward from D₀D₀ to D₂D₂.
• At the original price OP, supply exceeds demand, leading to excess supply.
• This pushes the price downward.
• A new equilibrium is formed at point E_2, where D₂D₂ intersects the supply curve.
• The new equilibrium price falls to OP₂, and quantity falls to OQ₂.