Q1: What will happen to equilibrium price and equilibrium quantity if there is change in

income of the consumer?

Answer

There are four possible outcomes.

Change in income of the

consumer

Normal Goods Inferior goods

If there is increase in income, If there is decrease in income,

demand increases and as a result
equilibrium price increases as
well as equilibrium quantity
increases.
fig 1
If there is increase in income, If there is decrease in income,
demand decreases and as a result
demand decreases and as a result demand increases and as a result
equilibrium price decreases as
equilibrium price decreases as equilibrium price increases as
well as equilibrium equilibrium
well as equilibrium decreases. well as equilibrium increases.
decreases.
fig 2 fig 1
fig 2

Figure 1 figure 2

Q2: What will happen to equilibrium price and equilibrium quantity if there is change in
price of related goods?

Answer
There are four possible outcomes

Change in Price of related goods

Susbtitutes Complementary

If there is increase in price of
substitute, demand increases and
as a result equilibrium price
increases as well as equilibrium
increases.
fig 1
If there is decrease in price of
substitute, demand decreases
and as a result equilibrium price
decreases as well as equilibrium
decreases.
fig 2
If there is increase in price of
complementary, demand
decreases and as a result
equilibrium price decreases as
well as equilibrium decreases.
fig 2
If there is decrease in price of
complementary demand
increases and as a result
equilibrium price increases as
well as equilibrium increases.
fig 1

Figure 1 figure 2

Q3: What will happen to equilibrium price and equilibrium quantity if there is change in
taste and preferences?

Answer
 Change in taste and preferences

Favourable change Unfavourable Change

If there is ifavourable change in If there iis unfavourable change in

taste and preferences, demad
increases and as a result equilibrium
price increases as well as
equilibrium increases.
fig 1
taste and preferences, demand
decreases and as a result
equilibrium price decreases as well
as equilibrium decreases.
fig 2

Figure 1 figure 2

Shift in supply curve

Q4: What happens to equilibrium price and equilibrium quantity if there is change in
number of producers?
 Number of producers

Increase Decrease

If there is increase in number of

firms, supply will increase and as a
result equilibrium price will decrease
and equilibrium quantity will
increase
fig 3
If there is decrease in number of
firms, supply will decrease and as a
result equilibrium price will increase
and equilibrium quantity will
decreasef ig 4

Figure 13 figure 4

Q5: What will happen to equilibrium price and equilibrium quantity if there is change in
government policy?

Answer
 Change in government policy

Change in taxes Change in subsidies

If there is increase in taxes,
supply will decrease and as a
result equilibrium price will
increase and equilibrium quantity
will decrease
fig 4
If there is decrease in taxes,
supply will increase and as a
result equilibrium price will
decrease and equilibrium
quantity will increase
fig 3
If there is increase in subsidies,
supply will increase and as a
result equilibrium price will
decrease and equilibrium
quantity will increase
fig 3
If there is decrease in subsidies,
supply will decrease and as a
result equilibrium price will
increase and equilibrium quantity
will decrease
fig 4

Figure 3 figure 4

Q6: What will happen to equilibrium price and equilibrium quantity if there is change in
cost of production?

Answer
 Cost of Production

Increase Decrease

If there is increase in cost, If there is increase in cost,

supply will decrease and as a
result equilibrium price will
increase and equilibrium
quantity will decrease
fig 4
supply will increase and as a
result equilibrium price will
decrease and equilibrium
quantity will increase
fig 3

Figure 3 figure 4

Q7: Explain chain reaction in case of excess demand and excess supply.

Answer:

Excess demand Excess Supply

There will be competition amongst buyers There will be competition amongst sellers
They will get ready to pay a higher price There will get ready to accept a lower price.
At higher price, Demand will contract and At lower price, demand will expand, supply
supply will expand and equilibrium will will contract and equilibrium will be regained.
 regained.

SIMULTANEOUS CHANGE IN DEMAND AND SUPPLY

Q8: When there is simultaneous increase in demand and supply; equilibrium price may or
may not change. Defend or refute the statement with valid explanation.

Answer:
a) If both demand and supply increase
equally, there will be no change in
equilibrium price but equilibrium
quantity will increase as shown in
figure given below. It is so because
the effect of increase in demand and
increase in supply is in opposite
directions and it balances each other.
Equilibrium quantity will increase.

b) If increase in demand is more than

increase in supply, equilibrium price
will increase and equilibrium
quantity will also increase as shown
by figure given below. It is so
because when increase in demand is
more than increase in supply, the
effect of increase in demand
dominates.

c) If increase in supply is more than

increase in demand, equilibrium
price will decrease and equilibrium
quantity will increase as shown by
figure given below. It is so because
when increase in supply is more than
increase in demand, the effect of
increase in supply dominates.
Q9: When there is simultaneous decrease in demand and supply; equilibrium price may or
may not change. Defend or refute the statement with valid explanation.

a) If both demand and supply decrease

equally, there will be no change in
equilibrium price but equilibrium
quantity will decrease as shown in
figure given below. It is so because
both affect equilibrium price in
opposite directions and hence their
effect gets neutral.

b) If decrease in demand is more than

decrease in supply, equilibrium price
will decrease and equilibrium
quantity will also decrease as shown
in figure given below. It is so because
if decrease in demand is more than
decrease in supply, the effect of
decrease in demand dominates.
 c) If decrease in supply is more than D S1
D1
decrease in demand, equilibrium S
price will increase and equilibrium
quantity will decrease as shown in
figure given below. It is so because if
decrease in supply is more than
decrease in demand, the effect of
decrease in supply dominates.

Q 10: What will happen to equilibrium price and quantity when there is a decrease in
demand and increase in supply?

Answer: Demand Decreases and Supply Increase:-

a) When decrease in demand is equal

to increase in supply, equilibrium
quantity remains the same but
equilibrium price falls as shown in
the figure.

b) When decrease in demand is more

than increase in supply, then both
equilibrium quantity and price as
shown in the figure.

c) When decrease in demand is less

than increase in supply, equilibrium
quantity rises but equilibrium price
falls as shown in the figure.
Q9: What will happen to equilibrium price and equilibrium quantity if demand increases
and supply decreases?
Answer: Demand Increases and Supply Decreases:-
a) When increase in demand is equal to
decrease in supply, equilibrium
quantity remains the same at OQ,
but equilibrium price rises as shown
in the figure.

b) When increase in demand is more

than decrease in supply, both
equilibrium quantity and price rises
as shown in the figure.
c) When increase in demand is less
than decrease in supply, both
equilibrium quantity falls and price
rises as shown in the figure.