Market for a good is in equilibrium. There is simultaneous "decrease" both in demand and supply but there is no change in market price. Explain with the help of a schedule how it is possible. And also use diagram.
Dear student,
In a situation when there is simultaneous decrease in both demand and supply the equilibrium price would remain the same when the decrease in demand is equal to decrease in supply.
This can be understood with the help of the following schedule.
Initially the equilibrium is achieved at price equal to Rs 3 where quantity demanded is equal to quantity supplied (15 units). With the simultaneous decrease in both quantity demanded and quantity supplied the equilibrium is again established at price equal to Rs 3 where quantity demanded equals to quantity supplied (10 units).
According to the diagram D1D1 is the initial demand curve and S1S1is the initial supply curve. The initial equilibrium is established at point E1 where the demand curve and the supply curve intersect each other. The equilibrium price is P1 while the equilibrium quantity is Q1.
Now, with a simultaneous decrease in both the demand and supply in the same portion both the demand curve as well as the supply curve shift parallely leftward to D2D2 and S2S2 respectively. The new equilibrium is established at point E2 where the demand curve and supply curve intersect each other. At the new equilibrium the equilibrium price is the same (P1) while the equilibrium quantity has reduced to Q2.
In a situation when there is simultaneous decrease in both demand and supply the equilibrium price would remain the same when the decrease in demand is equal to decrease in supply.
This can be understood with the help of the following schedule.
| Price | Initial Quantity Demanded QD1 |
Initial Quantity Supplied QS1 |
Final Quantity Demanded QD2 |
Final Quantity Supplied QS21 |
| 0 | 30 | 0 | 25 | - |
| 1 | 25 | 5 | 20 | 0 |
| 2 | 20 | 10 | 15 | 5 |
| 3 | 15 | 15 | 10 | 10 |
| 4 | 10 | 20 | 5 | 15 |
| 5 | 5 | 25 | 0 | 20 |
| 6 | 0 | 30 | 25 |
Initially the equilibrium is achieved at price equal to Rs 3 where quantity demanded is equal to quantity supplied (15 units). With the simultaneous decrease in both quantity demanded and quantity supplied the equilibrium is again established at price equal to Rs 3 where quantity demanded equals to quantity supplied (10 units).
According to the diagram D1D1 is the initial demand curve and S1S1is the initial supply curve. The initial equilibrium is established at point E1 where the demand curve and the supply curve intersect each other. The equilibrium price is P1 while the equilibrium quantity is Q1.
Now, with a simultaneous decrease in both the demand and supply in the same portion both the demand curve as well as the supply curve shift parallely leftward to D2D2 and S2S2 respectively. The new equilibrium is established at point E2 where the demand curve and supply curve intersect each other. At the new equilibrium the equilibrium price is the same (P1) while the equilibrium quantity has reduced to Q2.
