Question

Demonstrate graphically, the effect of the increase in the intercept of the demand function in (b) above on the equilibrium quantity and price. What generalization can you come up with from the resulting graphical analysis? 

Answer 1

An increase in the intercept of the demand function will cause an increase in the quantity demanded from D to D1 consequently leading to an increase in the equilibrium price and quantity of a good.

1. The increase in demand causes excess demand to develop at the initial price. Excess demand will cause the price to rise from P to P1 and as a result of increase in price, producers are willing to sell more, thereby increasing output from Q to Q1