Question

Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

With the help of a diagram, show how the equilibrium price can remain unchanged even after a rightward shift of the demand curve.

Answer 1

(a) When Demand and Supply Increase in the Same Proportion:

1. Let the initial equilibrium be at point E₁, where the original demand curve (D₁D₁) and supply curve (S₁S₁) intersect.
2. The initial equilibrium price is P₁ and the quantity is q₁.
3. Suppose both demand and supply increase by the same proportion:
   • Demand curve shifts to D₂D₂.
   • Supply curve shifts to S₂S₂.
4. The new curves intersect at point E₂ with
   • Same price: P₁ (unchanged)
   • Higher quantity: q₂ (increased)

(b) When Demand Increases More Than the Increase in Supply:

1. Initial equilibrium is at point E₁ with price P₁ and quantity q₁.
2. Demand increases more than supply.
   • Demand curve shifts to D₂D₂.
   • Supply curve shifts to S₂S₂.
3. New equilibrium is at point E₂, where:
   • Price rises to P₂
   • Quantity increases to q₂

(c) When the Increase in Demand is Less Than the Increase in Supply:

1. Initial equilibrium is at point E₁ with price P₁ and quantity q₁.
2. Supply increases more than demand.
   • Demand curve shifts to D₂D₂.
   • Supply curve shifts to S₂S₂.
3. The new intersection point is E₂, leading to
   • Lower price: P₂
   • Higher output: q₂