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    Studying the effects of shifts in demand and supply curves

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    A market is in equilibrium with quantity Q* and price P*.

    a. What happens to P* if there is an increase in supply?

    b. What happens to Q* if there is a decrease in supply and a decrease in demand?

    c. What happens to P* if there is an increase in demand followed by a decrease in supply followed by another increase in demand?

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    Solution Preview

    Please refer attached file for graphs.

    Solution:

    a. What happens to P* if there is an increase in supply?
    As shown in the graph, a market is in equilibrium at P* and Q*. Suppose there is an increase in the supply and Supply curve moves to S'S'. New equilibrium Price is P' and Quantity is Q'.
    We observe that Equilibrium price is lower than ...

    Solution Summary

    The solution explains the effects of various shifts in demand and supply curves on equilibrium price and quantity with suitable graphs.

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