| Market for a good is in equilibrium. The demand for the good 'decreases'. Explain the chain of effects of this change. |
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Answer:
If market demand decreases, then the market demand curve shifts parallel leftwards to\[{{D}_{2}}{{D}_{2}}\]. Now, at the initial price\[O{{P}_{1}}\], there exists excess supply equivalent to \[O{{q}_{1}}-Oq{{'}_{1}}\]among the producer?s increases and they try to get rid of the excess stock by selling their output at comparatively lower price. The price will continue to fall until it reaches\[O{{P}_{2}}\], and the new equilibrium is established at point\[{{E}_{2}}\], where the new demand curve \[{{D}_{2}}{{D}_{2}}\] intersects the initial market supply curve\[{{S}_{1}}{{S}_{1}}\]. Hence, a decrease in market demand with supply remaining constant, results in fall in the equilibrium price as well as the equilibrium quantity.
Decrease in demand \[\Rightarrow \] Excess supply at the existing price \[\Rightarrow \] Competition among the producers \[\Rightarrow \] Fall in the price level \[\Rightarrow \] New equilibrium \[\Rightarrow \] Fall in both quantity demanded as well as price.
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