Page 6 - Home Assignment-Price determination

Y |

Pri S

|
ce

|
E
F
P

D

X

|
O Q Quantity demanded
and quantity supplied
 In the above diagram the equilibrium price ‘OP’ and quantity ‘OQ’

is determined at point ‘E’ where market demand = market supply.
 Due to decrease in supply the supply curve shifts left ward to
|
resulting an excess demand situation in the market by EF.
 In order to overcome the excess demand situation, the price level
|
will increase, it will lead to expansion in supply from F to and
|
contraction in demand from E to .
|
 Finally, the equilibrium price will increase to and quantity will
|
decrease to respectively.
Case-2

Demand remaining constant with the increase in supply the equilibrium
price will fall but the quantity will rise.

Y

S
Pri

|
ce

E F
P

|
|

D

X
|
O Q Quantity demanded
and quantity supplied