Question

Draw a supply and a demand curve and label the market equilibrium on the axes with P1 and Q1.

Illustrate the effect of an increase in demand on price and quantity. Label the new equilibrium values on the axes with P2 and Q2.

In your own words and in detail explain the market adjustment leading to the new equilibrium.
Show the relevant elements of your explanation in the graph

Answer 1

In the above diagram it can be seen that the equilibrium is the point where demand and supply curve intersects

now when there is increase in the demand then this will causes increase in the equilibrium price and equilibrium quantity

increase in demand can happens by shifting factors like

• increase in the income level of consumers
• increase in the tase and preferences of the consumers etc
• the new equilibrium point is E2