Question

Explain with the help of diagrams how equilibrium price and quantity change when both demand and supply decrease (both demand and supply curves shift to the left).

Answer 1

When both the demand and supply of a commodity decrease simultaneously, the effect on equilibrium price can vary depending on the relative extent of the shifts, but the equilibrium quantity will definitely fall.

This situation is shown in the diagram above. Initially, the demand curve is D₁D₁ and the supply curve is S₁S₁, intersecting at point E₁, where the equilibrium price is OP₁ and the quantity is OQ₁. Due to a decrease in demand and supply, both curves shift leftward to DD and SS, respectively. The new intersection point E determines the new equilibrium, where the price becomes OP and the quantity becomes OQ.

As seen in the diagram, the equilibrium quantity decreases from OQ₁ to OQ. However, the effect on price depends on the magnitude of the shifts:

• If the fall in demand is greater than the fall in supply, price will fall.

• If the fall in supply is greater than the fall in demand, price will rise.

• If both fall equally, the price may remain unchanged.

In the given diagram, the price remains constant while the quantity falls, indicating an equal decrease in demand and supply.