question_answer

When both demand and supply fall simultaneously, what will be the effect on equilibrium price? Explain with the help of a diagram.

OR

Explain the effect of decrease in supply when

(i) demand is perfectly elastic

(ii) demand is perfectly inelastic

 

Answer:

    Equilibrium Price The price at which market demand equals market supply is termed as equilibrium price.             When demand and supply both fall simultaneously, there are three possible conditions under this situation: (i) No Change in Equilibrium Price If there is proportionately equal change in demand and supply, the equilibrium price will remain constant, as shown in the following figure: Demand and Supply Diagram Showing No Change in Equilibrium Price (ii) Equilibrium Price can Fall If decrease in demand is greater than decrease in supply, then equilibrium price will fall, as shown in the following figure : Demand and Supply Diagram Showing Fall in Equilibrium Price (iii) Equilibrium Price can Rise If decrease in demand is less than decrease in supply, the equilibrium price will increase, as shown in the following figure: Demand and Supply Diagram Showing Rise in Equilibrium Price The effect of decrease in supply when                                                            (i) Demand is Perfectly Elastic Decrease in supply of commodity does not cause any change in its price. in case demand for the commodity is perfectly elastic. Only equilibrium quantity tends to change.   Quantity Demand is infinite at existing price. So, decrease in supply does not cause any change in price.        (ii) Demand is Perfectly Inelastic Decrease in supply of commodity causes rise in price and equilibrium quantity remains constant when demand for commodity is inelastic.                             Quantity Demand is constant at every price. So, decrease in supply does not cause any change in price.