Chapter 3, Problem 3.5LO

To determine

Change in the equilibrium price and quantity with an increase or decrease in demand or supply.

Concept Introduction:

Law of Demand- The neo-classical economist, Alfred Marshall established an inverse relationship between price and quantity demanded, assuming ceteris paribus or keeping all other variables constant. The demand curve is accordingly a downward sloping curve from left to right keeping the price on the Y-axis and quantity demanded on the X-axis

Law of Supply- The law establishes a direct relationship between price and quantity supplied assuming ceteris paribus or keeping all other variables constant. The supply curve is accordingly an upward sloping curve from left to right keeping the price on the Y-axis and quantity supplied on the X-axis.

Increase/Decrease in demand- Change in demand consequent upon a change in the factors other than price cause the demand to increase or decrease. Change in income, wealth or preferences of the consumers, for example, are factors that lead to a change in the demand among other factors. Prices remaining unchanged, these factors cause the demand curve to shift inward or outward.

Increase/Decrease in Supply- Change in supply consequent upon a change in the factors other than price cause the supply to increase or decrease. Change in technology, cost of the factors of production, factor productivity etc, for example, are factors that lead to a change in the supply among other factors. Prices remaining unchanged, these factors cause the supply curve to shift inward or outward.

Market Equilibrium- The market is said to be stable or in a state of equilibrium when the demand equals supply. Graphically it implies the point of intersection of the demand and the supply curve. At this point, the quantity demanded is equal to the quantity supplied and the price at which the two are equal is the equilibrium price.