Market of a commodity is in equilibrium, demand for the commodity ‘increases’. Explain the chain of effects of this change till the market again reaches equilibrium. Use diagram.
Effect of increase in demand of a commodity on equilibrium price and quantity is discussed below with reference to the given figure.
In the given figure, DD and SS are the initial demand curve and supply curve respectively. E is the initial equilibrium point, OQ is the equilibrium quantity and OP is the equilibrium price. Increase in demand implies a shift in demand curve to the right. This sets in the following chain of effects.
Increase in demand implies that more is supplied at the existing price. Given supply, price of the commodity will tend to increase . Rise in price will cause contraction of demand and extension of supply. Hence, equilibrium quantity increases.