A Market for a good is in equilibrium. Demand for good ‘increases’. Explain the chain effects of this change.

The market for a good is at equilibrium means that quantity demanded of the good is equal to the quantity supplied of that good.

The diagram for the case when the market remains in equilibrium is shown below:

• In the above diagram dd is the demaand curve and ss is the supply curve. E1 is the equilibrium point corresponding to which P1 and Q1 are the equilibrium price and quantity respectively.

• Now the demand for good increases.

• The demand curve will shift rightwards.

• This causes the equilibrium price to rise and equilibrium quantity to rise too. This is shown in the next diagram.

• It is seen that demand curve shifts parallely rightwards and the new demand curve becomes dd1.

• The intersection point of the new supply curve dd1 and the supply curve gives the new equlibrium point corresponding to which P2 and Q2 are the equilibrium price and quantity respectively.