Question

Discuss how the equilibrium price and quantity change when a change in demand occurs and the supply stays constant, and when a change in supply occurs and the demand stays constant.

Answer 1

• The changes in both the supply and demand affect the equilibrium quantity and price when either of them are held constant.
• When supply decreases when the demand is held constant, the equilibrium price increases and the quantity falls. This will cause the supply curve to shift upwards.
• For example :- when the supply of wheat decreases, the price of bread rises.
• Similarly when supply decreases, the equilibrium price falls and the quantity increases. This will cause the supply curve to shift downwards.
• For example:- if more wheat is supplied, the price of bread falls when demand does not increase.
• Now let us consider how the changes in the demand curve affect equilibrium price and quantity when supply is held constant.
• When demand increases, both the equilibrium price and quantity increase. This will shift the demand curve upwards.
• For example :- when the demand for umbrella's rise during rainy seasons, their price and quantity also rise during this season.
• Similarly when the demand decreases, both the equilibrium price and quantity decreases. This will shift the demand curve downwards.
• For example :- the demand for woollen clothes fall during summer which decreases their price and the quantity produced.