Question

Show, with the help of a diagram, the effect of the following change on the equilibrium price:

When the demand for a commodity alone increases.

Answer 1

In the diagram, the original demand and supply curves are shown as D₀D₀ and SS, respectively. These curves intersect at point E₀, which represents the initial equilibrium, with OP₀ as the equilibrium price and OQ₀ as the equilibrium quantity.

When there is an increase in demand, the demand curve shifts rightward from D₀D₀ to D₁D₁. At the same price OP₀, the new quantity demanded rises to OQ₃, but the quantity supplied stays at OQ₀. This causes an excess demand equal to Q₀Q₃. As a result, the shortage pushes the price upward, moving the market toward a new equilibrium.