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

#### Solution

(a) When demand and supply increase in the same proportion:

E_{1} is the initial equilibrium with equilibrium price *P*_{1} and equilibrium output *q*_{1}.

Now, let us suppose that the demand increases to D_{2}D_{2} and the supply increase to S_{2}S_{2} by the same proportion. The new demand and new supply curve intersect at E_{2}, which is the new equilibrium, with a new equilibrium output *q*_{2}, but the same equilibrium price *P*_{1}. Thus, an increase in the demand and the supply by the same proportion leaves the equilibrium price unchanged.

(b) When demand increases more than the increase in supply:

The original demand and supply curves intersect each other at E_{1} with initial equilibrium price *P*_{1} and initial equilibrium output *q*_{1}.

Now, let us suppose that the demand increases and thereby the demand curve shifts to D_{2}D_{2}; the supply curve also shifts rightwards to S_{2}S_{2}. However, the increase in supply is less than the increase in demand. The new supply curve and the new demand curve intersect each other at point E_{2} with higher equilibrium price *P*_{2} and higher equilibrium output *q*_{2}.

(c) When the increase in demand is less than the increase in supply:

Let the initial equilibrium be at E_{1} with the equilibrium price *P*_{1} and equilibrium output *q*_{1}. Now, let us suppose that the demand increases to D_{2}D_{2} and the supply increases to S_{2}S_{2}; where the increase in supply is more than that of demand. The new demand curve D_{2}D_{2} and the new supply curve S_{2}S_{2} intersect at E_{2}. Thus, the greater increase in supply curve as compared to the demand curve will lead the equilibrium price to fall and equilibrium output to rise.