Question

a. Draw a supply and demand curve. Label all axes and curves appropriately. Label the equilibrium point, the equilibrium quantity, and the equilibrium price. b. Explain what equilibrium in the market is and why there is a tendency toward it. (In other words, if the price of something is higher or lower than the equilibrium price, what forces (i.e., human behavior) push the price and quantity to equilibrium.) c. Illustrate and explain how equilibrium price and quantity change when either the supply or demand curve shifts: 1) an increase in Demand; 2) an increase in Supply; 3) a decrease in Demand; 4) a decrease in Supply.

Answer 1

Market equilibrium takes place where demand and supply are equal to each other. Here the equilibrium price is p and equilibrium quantity is q . If price increases and reaches to p1 then surplus will take place. The reason is that aggregate supply will increase than aggregate demand and new firms will enter in the market . Then pricees will decrease and again equilibrium will attain.

If price decreases and reaches to p2 then shortage will take place. The reason is that aggregate supply will decrease than aggregate demand and new firms will exit in the market . Then prices will increase and again equilibrium will attain.

Effect on equilibrium price and quantity

Increase in demand -

Due to increase in demand , demand curve will shift upward and equilibrium price will increase to p1 and equilibrium output will increase to q1.

B) An increase in supply-

D

Due to increase in supply , supply curve will shifft rightwards and equilibrium price will decrease to p1 and output will increase to q1

C) Decrease in demand-

Due to decrease in demand , demand curve will shift downward and equilibrium price will decrease to p1 and equilibrium output will decrease to q1.

D) A decrease in supply -Due to decrease in supply , supply curve will shifft lefttwards and equilibrium price will increase to p1 and output will decrease to q1