Question

A supply-demand graph can be described as having a demand curve that begins in the upper left and slopes downward to the lower right; and having a supply curve demand decreases.

Using words in a narrative, please describe and explain how both the equilibrium price and quantity will change when:

a) Only supply decreases
b) Only supply increases
c) Only demand increases
d) Only demand decreases

Answer 1

Solution : (a)

(a) Diagram: Explanation

Equilibrium is attained at the intersection of the demand and supply curve. When supply decreases the SS curve shifts leftwards to become S'S'. This results in Qe to reduce to New Equilibrium quantity that is Qe'. And, the price increase to new equilibrium price Pe'.

Answer (a): When only supply decreases the upward sloping curve, the supply curve shifts to the left causing the equilibrium quantity to reduce and Equilibrium price to rise.

Solution (b)

With an increase in supply, the supply curve shifts to the right to become S'S". The new equilibrium changes from point E to point E'. Thus the new equilibrium quantity increases to Qe'. And New equilibrium Price will fall down to Pe'

Answer (b): With an increase in supply, the supply curve shifts right. The equilibrium quantity increases and equilibrium price falls.

Solution (c):

Explanation :

When the demand for good increases, the demand curve shifts rightward to become D'D'. This shift in curve changes the equilibrium to change from E to E'. At the new equilibrium, Q increases to Qe' and Price rises to Pe'.

Answer (c): If only demand for a good increase the Demand curve shifts to the right. Thus, Equilibrium quantity increases and the equilibrium price also increases.

Solution (d):

Explanation:

When only demand for a good decreases the demand curve shifts leftwards to D'D'. Thus, the new equilibrium is attained at the intersection of D'D' curve and SS curve. The equilibrium is now at E'. The new attained equilibrium quantity falls to Qe' and the new equilibrium price falls to Pe'.

Answer (d): When only demand for a good decreases, the demand curve shifts leftwards. Thus, both equilibrium quantity and equilibrium price falls.