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Market for a good is in equilibrium. There is increase in demand for goods. Explain the chain of effects of this change. Use diagram. Or How does an increase in demand of a commodity affect its equilibrium price and equilibrium quantity? Explain with the help of a diagram. Or How will equilibrium price and quantity be affected when there is rightward shift of demand curve? |
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Answer» Solution :As given in the examination PROBLEM that market for a good is in equilibrium. So, we assume that initial PRICE is OP as shown in the FIGURE ` (##FM_M_ECO_XII_P1_C12_E02_039_S01.png" WIDTH="80%"> In the given figure price is on vertical axis and QUANTITY demanded andd supplied are on horizontal axis. But due to increase in demand, demand curve shifts rightward from DD to `D_(1)D_(1)`. With new demand curve `D_(1)D_(1)` there is excess demand at initial price OP because at price OP, demand is PB and supply is PA, so there is excess demand of AB at price OP. Due to this excess demand, Competition among the consumer will rise the price. With the rise in price, there is upward movement along the demand curve (contraction in demand) from B to C and similarly, there is upward movement along the supply curve (expansion in supply) from A to C . So, finally equilibriun price rises from OP to `OP_(1)` and equilibrium quantity also rises from OQ to `OQ_(1)` Conclusion Due to increase in demand, (i) Equilibrium price rises from OP to OP (ii) Equilibrium quantity also rises from OQ to `OQ_(1)`. |
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