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FUNDAMENTALS OF ECONOMICS Using diagrams, explain what happens to PRICE and QUANTITY when Demand increases and Supply increases, and when Supply falls and Demand increases.
Pages 5 (1255 words)
Demand refers to the buyer's willingness and ability to purchase goods while supply refers to the seller's willingness and ability to provide goods at different price levels (Dolan & Lindsey, 44). According to Paul Gregory, the law of demand states that there is an inverse relationship between the price of a good and the quantity demanded…
The diagram below shows the supply and demand curve for good X and the equilibrium price and quantity.
In diagram above, the quantity of supply and demand are equal at price 50. If the supply and demand curve won't move, the market price of Good X will not change. If the demand for good X will increase, the demand curve will shift to the right or will exhibit an outward shift.
An increase in demand will cause a movement along the supply curve which will result to the rise of equilibrium quantity and price. With the new demand curve, supply and demand of good X equals to 5 at price 60. Price and quantity both increased. This means that an increase in the demand of good X made firms in the market to sell good X at a higher price. However, an increase in supply will show another different result. This is shown in Figure 3.
With the new demand and supply curve, D2 and S2, the quantity of good X decreased to about 3.75 units while the price increased by about 78 units. This just proves the law of demand that as the price of good X increases, the quantity demanded decreases.
There are a lot of reasons that can cause an increase in demand and supply. ...
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