Question

1. Draw and label a graph illustrating a demand and supply of anything. Show how an increase in supply and a decrease in demand could result in a lower equilibrium price and a lower equilibrium quantity.
2. Draw and label a graph illustrating a demand and supply of anything. Show how an increase in supply and a decrease in demand could result in a lower equilibrium price and a greater equilibrium quantity.

Answer 1

1. The initial equilibrium price is P and the quantity is Q, and the increase in the supply is shown by the rightward shift of the supply curve , the decrease in the demand is shown by the leftward shift of the demand curve. The equilibrium price declines from P to P1 and the quantity from Q to Q1. It is to be noted that the magnitude of the two shifts are different the demand decreases more than the increase in the supply. If the demand and the supply shifts at the same magnitude the equilibrium price decreases and the quantity will remain the same.

2. The initial price and the quantity is P and Q, and then the demand cure shifts to the left and the supply curve shifts to the right. In this time, the increase in the supply is more than the decrease in the demand, the magnitude of the shifts is different. The equilibrium price decreases from P to P1 and the quantity increases from Q to Q1.