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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 the supply of a commodity on its equilibrium price and quantity.
OR
Explain the chain of effects of decrease in supply of a good on its price, supply and demand. Use diagram.
✓

Answer

The diagram shows that the original demand curve DD and original supply curve SS of the commodity intersect each other at point E. OP is the original equilibrium price and OQ is the original equilibrium quantity. Now due to decrease in supply of a good, the supply curve SS shifts to the left $(S_0S_{­0})$, demand curve remaining unchanged. At the original price OP, the quantity demanded is $OQ$ which is greater than supply by $QQ_0 / AE$. The excess demand equal to $AE/QQ_0$​​​​​​​ emerges. This excess demand results in competition among the buyers leading to a rise in the price. A rise in price results in a fall in quantity demanded (an upward movement along the demand curve) and a rise in quantity supplied (an upward movement along the new supply curve). These changes continue till we reach price $OP_1​​​​​​​$​​​​​​​. This is new equilibrium price at which quantity demanded and quantity supplied are equal. Hence, equilibrium price rises from $OP$ to $OP_1​​​​​​​$​​​​​​​ and equilibrium quantity falls from $OQ$ to $OQ_1​​​​​​​$​​​​​​​.

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