Q. 135.0( 1 Vote )

Market for a good is in an equilibrium. Suppose supply decrease. Giving reasons explain its effects on equilibrium price and quantity. Use diagram.

Answer :

Fall in supply will shift the supply curve to the left. This causes a situation a deficiency of supply. Accordingly, price tends to rise in response to rise in price, demand tends to contract and supply tends to extend. This process will continue till price is reached where quantity demanded is equal to the quantity supplied. This occurs at new equilibrium point E1.

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