Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Question

Philoid · Accepted Answer

The effect of rightward shift of both demand and supply curve on equilibrium price and quantity can be explained in following three manners –

1. Where demand and supply increase in same proportion - In this case the equilibrium price will remain unchanged.

In the given graph the original demand curve shifts from DD to D₁D₁ and supply curve from SS to S₁ S₁ due to which the equilibrium point shifts from E to E₁ but the equilibrium price is same i.e. P.

2. Where demand increases more than the increase in supply - In this case the equilibrium price will rise.

In the given graph the original demand curve shifts from DD to D₁D₁ and supply curve from SS to S₁ S_1. The increase in demand curve is more than that in the supply curve due to which the equilibrium point shifts from E to E₁ which increases the equilibrium price to P₁.

3. Where demand increases less than the increase in supply - In this case the equilibrium price will fall.

In the given graph the original demand curve shifts from DD to D₁D₁ and supply curve from SS to S₁ S_1. The increase in supply curve is more than that in the demand curve due to which the equilibrium point shifts from E to E1 which decreases the equilibrium price to P₁.