Demand, Supply and Equilibrium Price

Demand Supply Equilibrium Price Assignment Help

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Elasticity of Demand & Supply and Equilibrium Price

The exact impact of a change in demand or supply on the price will depend on the speed with which demand reacts to a change be in supply or supply reacts to a change in demand. In cases where supply cannot be increased or decreased price changes will be very pronounced, but where it is possible to do so, price may not rise or fall by much. In other words, the market price is greatly influenced by the elasticity of demand and supply of a commodity. If the demand for the goods is less elastic (as is the case with many essential commodities), a change in the supply of the commodity will not lead to any significant change in the quantity demanded. If supply of such a commodity were to be increased, there will be sharp fall in the price of the commodity. If the demand is more elastic, people will buy more of the commodity when its supply increases and price will not fall significantly.

The elasticity of supply the price in the exactly opposite way. If the commodity has a less elastic supply (this happens when production of a commodity cannot be increased immediately, e.g. food grains), supply cannot be adjusted to changes in demand. Under these conditions, if an increase in demand, prices will rise significantly, and a fall in demand will bring about a steep fall in prices. In case, the supply is more elastic, an increase in demand will be matched by an increase in supply and only a small rise in price will result.


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