Advertisements
Advertisements
Question
How is equilibrium price affected by changes in demand for the commodity (shift in demand curves)?
Advertisements
Solution
When there is a change in demand, the demand curve shifts, leading to a new equilibrium price and quantity in the market.
If there is an increase in demand, the demand curve shifts to the right. At the original price, demand becomes greater than supply, creating excess demand. Due to this, sellers raise the price, and quantity supplied increases. This results in a new, higher equilibrium price and quantity.
On the other hand, if there is a decrease in demand, the demand curve shifts to the left. At the original price, supply exceeds demand, creating excess supply. Sellers reduce the price to clear the unsold stock. As the price falls, quantity demanded rises and supply falls until a new, lower equilibrium price and quantity are established.
Thus, any shift in the demand curve leads to a change in the equilibrium price and quantity, depending on the direction of the shift.
