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Market of a Good is in Equilibrium. If the Demand for the Good 'Decreases'. Explain the Chain of Effects of this Change. - Economics

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Market of a good is in equilibrium. If the demand for the good 'decreases'. Explain the chain of effects of this change.

 

 
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Solution

If the market is in equilibrium and the demand decreases, then the demand curve will shift towards left as shown in the figure below:

Now, if market demand decreases, then the market demand curve shifts parallely leftwards to D2D2. Now, at the initial price OP1, there exists excess supply equivalent to Oq1 – Oq'1 units of output. Due to the excess supply, the competition among the producers increases and they try to get rid of the excess stock by selling their output at comparatively lower price. The price will continue to fall until it reaches OP2, and the new equilibrium is established at point E2, where the new demand curve D2Dintersects the initial market supply curve S1S1. Hence, a decrease in market demand with supply remaining constant, results in fall in the equilibrium price as well as the equilibrium quantity.
To summarise,
Decrease in demand ⇒ Excess supply at the existing price ⇒ Competition among the producers⇒ Fall in the price level ⇒ New equilibrium ⇒ Fall in both quantity demanded as well as price.

Concept: Market Demand
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