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If at a given price of the commodity there is excess demand, how will the equilibrium price be reached4? Explain with the help of a diagram. OR If equilibrium price of a good is grcater than its market price, explain all the changes that will take place in the market. Use diagram. OR Explain the changes that will take place in the market for a commodity if the prevailing market price is less than the equilibrium price. |
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Answer» Solution :If at a given price let at `P_(1)` there is excess demand as shown in the given figure. ` (##FM_M_ECO_XII_P1_C12_E02_037_S01.png" width="80%"> In the given diagram the excess demand of AB at price `P_(1)` creates a COMPETITION among the buyers, which will increase the price from `P_(1)` to P. It can be explained in the following two cases: CASE I: UPWARD movement along the supply curve (Expansion in Supply) Due to excess demand of AB, competition among the buyers, will rise the price from `P_(1)` to P. As we know positive relationship EXIST between price and quantity SUPPLIED. So, the rise in price from `P_(1)` to `P_(1)` will rise the supply from A to E. Case II: Upward movement along the demand curve (Contraction in Demand) Due to excess demand of AB, the price rises. As we know Inverse relationship exists between price and quantity demanded. So, due to rise in price from `P_(1)` to P the quantity demanded falls from B to E. It can also be explained with the help of the schedule that follows: In the above schedule, at price 1 there is an excess demand. Due to this excess demand price will rise til we reach the equilibrium at price 3. Note: Expansion in supply and Contraction in demand has to bedone simultaneously to reach the equilibrium price. ` (##FM_M_ECO_XII_P1_C12_E02_037_S02.png" width="80%"> |
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