Question

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

When the supply of a commodity alone increases.

Answer 1

• Initially, the market is in equilibrium at point E₀, where the original demand curve (DD) intersects the initial supply curve (S₀S₀).
• At this point, the equilibrium price is OP₀ and the equilibrium quantity is OQ₀.
• When supply increases, the supply curve shifts rightward from S₀S₀ to S₁S₁.
• At the old price OP₀, the quantity supplied becomes more than the quantity demanded, creating an excess supply.
• This leads to downward pressure on the price.
• A new equilibrium is reached at point E₁, where the new supply curve intersects the unchanged demand curve.
• At this new point, the equilibrium price falls to OP₁, and the equilibrium quantity rises to OQ₁.