Question

Why will the equilibrium price of a commodity not change even if its demand and supply both increase? Explain with the help of a diagram.

Show diagrammatically a situation when there is no change in equilibrium price.

Answer 1

When demand and supply increase by the same proportion, the equilibrium price stays constant. This is shown in the diagram, where DD and SS are the initial demand and supply curves. The original equilibrium is at point E, with OP as the price and OQ as the quantity. As demand increases, the curve shifts to D₁D₁, and due to a similar increase in supply, the supply curve shifts to S₁S₁. Since both shifts are equal, the new equilibrium moves to point E₁, where D₁D₁ intersects S₁S₁. The equilibrium quantity rises from OQ to OQ₁, but the price remains the same at OP.

Thus, when demand and supply increase equally, the equilibrium quantity increases, but the equilibrium price remains unchanged.