Explain the chain of effects of an increase in demand for a commodity on its equilibrium price and quantity
Solution:
When the demand of a good increases, the demand curve shifts rightwards. This increase in demand implies that more buyers are competing to buy that commodity. This competition leads to an increase in the price of the good as well as an increase in the equilibrium quantity. It can be shown as follows:
So, the chain effects of an increase in demand of a commodity on its equilibrium price and quantity can be summarised as follows:
Increase in demand ⇒ Excess demand at the existing price ⇒ Competition among the buyers ⇒ Rise in the price level ⇒ New equilibrium ⇒ Rise in both quantity demanded as well as price.
When the demand of a good increases, the demand curve shifts rightwards. This increase in demand implies that more buyers are competing to buy that commodity. This competition leads to an increase in the price of the good as well as an increase in the equilibrium quantity. It can be shown as follows:
So, the chain effects of an increase in demand of a commodity on its equilibrium price and quantity can be summarised as follows:
Increase in demand ⇒ Excess demand at the existing price ⇒ Competition among the buyers ⇒ Rise in the price level ⇒ New equilibrium ⇒ Rise in both quantity demanded as well as price.