Question

Note on the practical use of equilibrium concept in economic analysis. Pick 2 real life instances where you see demand and supply forces forming a series of new equilibrium for a commodity that you use / read about. Diagrammatically show the ups and downs in demand and supply over a period for these two commodities. With diagram

Answer 1

Answer to the question:

The first demand and supply example is about umbrella. This example is shown with the help of the following diagram.

In the above figure the initial demand and supply are shown with D1 and S1 lines. The intersection between the two demand and supply lines creates equilibrium at point E1. It is the initial equilibrium point with price P1 and quantity Q1.

Now, during the rainy season as the demand for umbrella increases the demand curve shifts to upward to D2. Supply remaining the same the demand curve D2 and supply curve S1 intersects and creates a new equilibrium E2 with new price and quantity. As we know that as demand exceeds supply price inceases, therefore in the above diagram, with the increase in the demand D2 the price increases to P2. So the new price increases to P2 and quantity inceases to Q2.

Some days later when supply increases by the manufacturing industries the supply curve shifts to the right side to S2. Here the new supply curve S2 and the demand curve D2 intersects and makes a new equilibrium point E3. As we all know as supply increases the price gets down, in the diagram also in this new equilibrium point E3, the price reduces to P3 and quantity becomes Q3.

Again, when rainy season gone the demand decreases the demand for umbrella goes down to D1 again and the demand D1 and supply curve S2 intersects at point E4 as shown in the diagram. As demand goes down the prices also goes down. Therefore the new price is P4 which is lower than P3 and new quantity becomes Q4 which is less than Q3.

So we can understand how the demand and supply of umbrella get changes with changing seasons (period). The changes in the periods changes the equilibrium points with price and quantity levels.

The another example of demand and supply is about winter cloths.

The can see that when winter arrives the prices of winter cloths changes in comparision to the prices that prevail in the summer season. because in the summer season normally we do not like to buy winter cloths. This example is shown with the hep of the diagram.

In the above diagram we can see that initially the demand and supply intersects at point E1 where the price is P1 and quantity is Q1. When winter arrives the demnad for winter cloths rises and the deand curve shifts to the right to D2 as shown in the diagram. The equilibium point becomes E2 and the equilibrium price becomes P2 and equilibrium quantity becomes Q2. Therefore we can see that as demand increases the prices also increases.

In the above diagram we can see that the supply increases to S3 which intersects with the demand curve D2 and creates a new equilibrium point E3. At this point the the prices reduces to P3 from P2 and quantity increases to Q3 from Q2.

From this example we can see how the price and quantity changes when demand and supply chnages.