EXPLAIN HOW A CHANGE IN THE FOLLOWING COMBINATIONS AFFECTS T

EXPLAIN HOW A CHANGE IN THE FOLLOWING COMBINATIONS AFFECTS THE SUPPLY AND DEMAND CURVES – AND THEIR RESULT ON PRICE AND QUANTITY. 1. AN INCREASE IN DEMAND AND AN INCREASE IN SUPPLY. 2. AN INCREASE IN DEMAND AND A DECREASE IN SUPPLY. 3. A DECREASE IN DEMAND AND AN INCREASE IN SUPPLY. 4. A DECREASE IN DEMAND AND A DECREASE IN SUPPLY

Solution

Demand and supply are two important force. They depends upon price. Demand is inversly related while supply is directly linked. So dfemand curve is dow ward sloping and supply curve is upward rising. at the intersection of two curves, market attais equilibrum.

When demand increases more units are demanded at same price. So demand curve shifts to the right. Just opposite is observed when demand decreases.

Now consider supply curve. With the increase in supply more units are supplied at same price. So supply curve also shifts to the right. Effect of such shifts in different combinations are shown below:

1. Increase in demand and supply: With the increase in demand and supply both curves are shifting to the right. So equilibrium quantity will increase. But change in equilibrium price will depend upon extent of shift in demand and supply. It may increase, decrease or remain constasnt.

2. Increase in demand and decrease in supply: Now demand curve is shifting to the right and supply curve is shifting to the left. Increase in demand riases price. Also decrease in suply will raise price as goods are scarce. Thus combined effect will surely increse equilibrium price. Also equilibrium supply will decrease as less quantity is available in the market.

3. Decrease in demand and increase in supply. When demand decreases supply exceeds demand. Unsold stock is there. So to sale them, price should decrease. Also increase in supply, increases unsold stock. So price should fall further. Thus both equilibrium price and quantity will decrease.

4. Decrease in demand and decrease in supply: Here both demand and supply curve will shift to the left. Decrease in demand and decrease in supply will surely reduce equilibrium quantity. But whether price will rise or not will depend upon magnitude of change in demand and supply. Decrease in demand will lower the price, but decrease in supply will raise it. So combined effect will ultimately determine the effect on equilibrium price.