12th Class Economics Solved Paper - Economics 2014 Delhi Set-III

  • question_answer
    Market for a product is in equilibrium. Supply of the product 'decreases.' Explain the chain of effects of this change till the market again reaches equilibrium. Use diagram.


    Decrease in the supply of the commodity leads to an increase in the equilibrium price and a fall in the equilibrium quantity. Let us understand how it happens: \[{{D}_{1}}{{D}_{1}}\] and \[{{S}_{1}}{{S}_{1}}\] represents the marker demand and market supply respectively. The initial equilibrium occurs at \[{{E}_{1}},\] where the demand and the supply intersect each other. Due to the decrease in the supply of the commodity, the supply curve will shift leftward parallel from \[{{S}_{1}}{{S}_{1}}\] to \[{{S}_{2}}{{S}_{2}}\], while the demand curve will remain unchanged. Hence, at the original price \[({{P}_{1}}),\] there will be a situation of excess demand, equivalent to \[({{q}_{3}}-{{q}_{1}})\]. Consequently, the price will rise due to excess demand. The price will continue to rise until it reaches, \[{{E}_{2}}\] (new equilibrium), where \[{{D}_{1}}{{D}_{1}}\] intersects the supply curve\[{{S}_{2}}{{S}_{2}}\]. The equilibrium price rises from \[{{P}_{1}}\] to \[{{P}_{2}}\]and the equilibrium output falls from \[{{q}_{1}}\] to\[{{q}_{2}}\].

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