Question
How is new equilibrium struck when supply or demand curve tends to shift?
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Answer
When supply or demand curve tends to shift, new equilibrium is struck through the process of extension and contraction of demand and supply. Generally, a change in demand or supply (implying increase or decrease in demand or supply) will lead to excess demand or excess supply. In a situation of excess demand ( $D >$ S), price will tend to rise causing (i) contraction of demand, and (ii) extension of supply. The process of contraction of demand and extension of supply would continue till new equilibrium is struck where demand $=$ supply. Likewise, in a situation of excess supply ( $S > D$ ), price will tend to fall causing (i) extension of demand, and (ii) contraction of supply. The process of extension of demand and contraction of supply would continue till new equilibrium is struck where demand $=$ supply
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