Question

In these two cases, you can use any example.

            (a) Explain what would happen to prices in a market equilibrium if there were an increase in the demand for a product. Give an example of a real life situation pertaining to this.

            (b) Explain what would happen to prices in a market equilibrium if there were an increase in the supply for a product. Give an example of a real life situation pertaining to this.

Answer 1

1 - If there is increase in the demand for the product , the supply will remain constant. This means that there will be shortage in the market. Due to this , the equlibrium price in the market will rise as more people will be willing for buy the product at the higher prices. Hence the equlibrium price will rise.

Suppose , if there are only 5 units of good X priced at $ 5 each. There are 15 consumers for this good. Hence these consumers will be ready to pay high so that they get the product and other not. Thus the equilibrium price will rise

2 - As the result of the increase supply , there will exist the surplus in market. Supply curve will shift right. To clear this off , demand needs to be increased. Hence the equlibrium price will decrease in this case.

Example - whenever there is heavy stock of grocery left with the roadside seller , he lowers the price of those , to sell more so that he clears off his stock .