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Market Equilibrium — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsMarket Equilibrium6 Marks
Question
Market for a good is in equilibrium. There is decrease in supply for this good. Explain the chain of effects of this change. Use diagram.
OR
Explain the chain effects of decrease in supply of a good on its price, supply and demand.
✓

Answer

As given in the examination problem that market for a good is in equilibrium. So, we assume that initial price is OP as shown in the given figure.

In the given figure price is on vertical axis and quantity demanded and supplied is on horizontal axis. But due to decrease in supply the supply curve shifts leftward from SS to $S_1S_1$. With new supply curve $S_1S_1,$ there is excess demand at initial price OP because at price OP, supply is PB and demand is PA, so there is excess demand of AB at price OP. Due to this excess demand competition among the consumer will rise the price. Due to this rise in price there is upward movement along the supply curve (Expansion in supply) from B to C and similarly, there is upward movement along the demand curve (Contraction in demand) from A to C. So, finally, equilibrium price rises from OP to $OP_1$ and equilibrium quantity falls from $OQ$ to $OQ_1.$
Conclusion: Due to decrease in supply,
  1. Equilibrium price rises from OP to $OP_1$.
  2. Equilibrium quantity falls from OQ to $OQ_1.$

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