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Market Equilibrium — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsMarket Equilibrium4 Marks
Question
Explain with the help of a diagram the effect of a decrease in demand for a commodity on its equilibrium price and quantity
OR
Explain the chain of effects on demand, supply and price of a commodity caused by a leftward shift of its demand curve. Use diagram.
✓

Answer



In the given diagram, $DD'$ shows the demand curve and $SS'$ shows the supply curve of a commodity. Point E denotes the point of equilibrium where $DD' = SS'$. $OP$ is the given equilibrium price and $OQ$ is the given equilibrium quantity. A decrease in demand leads to leftward shift of the demand curve. It is denoted by $D_0D_0$ curve. Now, at given price $OP$, new quantity demanded is $OQ_0$ which is less than supply by $QQ_0$. The excess supply equal to AE emerges.
This excess supply results in competition among the sellers leading to a fall in price. A fall in price results in rise in quantity demanded (a downward movement along the new demand curve) and a fall in quantity supplied (a downward movement along the supply curve) shown by arrows in the diagram. These changes continue till we reach price $OP_0$. This is new equilibrium price at which quantity demanded and supplied are equal at $OQ$. Hence equilibrium price falls from $OP$ to $OP_0$ and equilibrium quantity also falls from $OQ$ to $OQ_0$.

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