Answer to Question #178110 in Microeconomics for Muneeb

Question

Q. No. 1: Explain market equilibrium along with graph and diagram.

(a) Equal fall in demand and supply

(b) 25% increase in demand while 10% fall in supply (c) 30% increase in taxes and 20% increase in income (d) Rise in demand is more than rise in supply

(e) 40% fall in sales tax while 20% decrease in income

Answer 1

Market equilibrium is found where the demand curve and supply curve intersect. At this point, the quantity demanded equals the quantity supplied.

(a)Equal fall in demand and supply

A fall in demand causes a consequent decline in equilibrium quantity. Also, a fall in supply will lead to a fall in equilibrium quantity.Therefore, both curves will shift to the left and thus a new equilibrium quantity will be found, lower than the initial equilibrium quantity. However, the impact on the equilibrium price depends on the extent to which both curves shift.

(b) 25% increase in demand while 10% fall in supply

An increase in demand accompanied by a decrease in supply will cause a rise in the equilibrium price.

(c)30% increase in taxes and 20% increase in income

Imposition of taxes causes the equilibrium price to rise and a decline in equilibrium quantity demanded. An increase in income on the other hand increases consumption and thus a rise in equilibrium quantity demanded. However, since in this case the increase in tax is highier than income increase, there will be a shift in the demand curve to the left and thus the equilibrium price and quantity will fall.

(d)Rise in demand is more than rise in supply

When rise in demand exceeds rise in supply, the equilibrium price rises. This is because the extend by which the demand curve shifts to the right is highier than the extend by which supply curve shifts.

(e)40% fall in sales tax while 20% decrease in income

A fall in sales tax shifts the supply curve to the right while a decrease in income shifts the demand curve inwards. The effect will be a fall in both equilibrium price and quantity.