Question

Market for a good is in equilibrium. There is simultaneous “decrease” both in demand and supply but there is no change in market price. Explain with the help of a schedule how it is possible.

Answer 1

With a simultaneous decrease in both the demand and supply, it is possible that the equilibrium market price would not change under a situation where both demand and supply decrease in the same proportion. In such a case, only the equilibrium quantity falls, whereas, the equilibrium price remains unchanged.

The following schedule explains this. 

Price  (Rs)	Initial     Demand   (D1)	Initial     Supply   (S1 )	Final     Demand   (D2)	Final     Supply   (S2)
2	30	10	26	6
4	25	15	21	11
6	20	20	16	16
8	15	25	11	21
10	10	30	6	26

In the above schedule, initial equilibrium price is Rs 6 where both demand and supply are equal to 20 units. Now suppose both demand and supply decrease in the same proportion that is, by 4 units. Again, the equilibrium price is established at Rs 6 where both demand and supply equal at 16 units. 

In the above figure, S₁S₁ and D₁D₁ are the initial supply and demand curve respectively. Initial equilibrium is established at point E_1.Accordingly, Rs 6 is the equilibrium price and 20 units is the equilibrium quantity.

With a decrease in demand, the demand curve shifts parallely leftwards to D₂D₂. Simultaneously, with a equal fall in supply, the supply curve shifts parallely upwards to the left of S₂S₂. The new equilibrium is established at E₂. At the new equilibrium price has remained the same at Rs 6, but the equilibrium quantity has fallen from 20 units to 16 units.