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.
An increase in the demand for the commodity leads to an increase in the equilibrium price and quantity.
Here,
D1D1 and S1S1 represent the market demand and market supply respectively. The initial equilibrium occurs at E1, where the demand and the supply intersect each other. Due to the increase in the demand for the commodity, the demand curve will shift rightward parallel fromD1D1 to D2D2, while the supply curve will remain unchanged. Hence, there will be a situation of excess demand, equivalent to (q1' − q1). Consequently, the price will rise due to excess demand. The price will continue to rise until it reaches E2 (new equilibrium), where D2D2 intersects the supply curve S1S1. The equilibrium price increases from P1 to P2 and the equilibrium output increases from q1 to q2.
Giving reasons, state whether the following statements are true or false.
A monopolist can sell any quantity he likes at a price.
Why is the equality between marginal cost and marginal revenue necessary for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Explain.
Market for a good is in equilibrium. The demand for the good 'increases'. Explain the chain of effects of this change.
Explain the effects of 'maximum price ceiling' on the market of a good'? Use diagram.
