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| 1. |
Market for a good is in equilibrium. The supply of the good 'Increases'. Explain the chain of effects of this change. |
| Answer» <html><body><p></p>Solution :When the market is in equilibrium, this implies that the market demand is equal to the market supply at the equilibrium <a href="https://interviewquestions.tuteehub.com/tag/point-1157106" style="font-weight:bold;" target="_blank" title="Click to know more about POINT">POINT</a>. Now, in case the market supply increases, this <a href="https://interviewquestions.tuteehub.com/tag/leads-540453" style="font-weight:bold;" target="_blank" title="Click to know more about LEADS">LEADS</a> to a rightward shift in the market supply curve. This is because, an increase in supply refers to a <a href="https://interviewquestions.tuteehub.com/tag/rise-1189674" style="font-weight:bold;" target="_blank" title="Click to know more about RISE">RISE</a> in the supply of the given commodity due to change in factors other than price. Thus, in the given case the supply curve will shift towards right. As a result, there will exist a situation of <a href="https://interviewquestions.tuteehub.com/tag/excess-978535" style="font-weight:bold;" target="_blank" title="Click to know more about EXCESS">EXCESS</a> supply at the equilibrium point. This can be shown in the following diagram. <br/><img src="https://d10lpgp6xz60nq.cloudfront.net/physics_images/CBSE_COMM_SP_XII_ECO_E02_005_S01.png" width="80%"/> <br/>As the market supply increases, the initial supply shifts rightwards to the new supply curve `S_(2)S_(2)` from `S_(1)S_(1)`. Not at the initial market price of `OP_(1)`, there exists excess supply. Due to the excess supply, some of the existing firms are ready to sell the output at comparatively lower prices to increase their sale, <a href="https://interviewquestions.tuteehub.com/tag/therefore-706901" style="font-weight:bold;" target="_blank" title="Click to know more about THEREFORE">THEREFORE</a>, the market price will tend to fall. The fall in the market price will continue until it reaches `OP_(2)`. The new market equilibrium will occur at point `E_(2)`, where the new market supply curve intersects the initial demand curve. The total quantity supplied will be equal to the quantity demanded at `Oq_(2)` and the new equilibrium price will fall to `OP_(2)`.</body></html> | |