Market for a good is in equilibrium. There is 'increase' in supply of the good. Explain
the chain of effects of this change. Use diagram.
At equilibrium,if there is an increase in supply,this means upward movement along the supply curve. There will be an excess of supply which would pull the price down since there are too many goods and few buyers. A fall in price to increase the demand would mean more fall in supply as suppliers would not be willing to sell goods at low prices,this would create a situation of excess demand which will push the prices up so much so that there arises a situation of excess supply.This spiral effect will go on till demand and supply settle back at the equilibrium.
This can be seen in the following diagram :
ss and dd are supply and demand curves.The spiral shows the chain effect.The effect will ultimately converge to point "E" which is point of equilibrium.