• # question_answer X and Y are complementary goods. The price of Y falls. Explain the chain of effects of this change in the market of X. Or Explain the chain of effect of excess demand of a good on its equilibrium price.

 If X and Y are complementary goods, then a fall in the price of good Y will lead to a rise in the demand of good X. Graphically, the effect of this change can be seen as follows Here, suppose ${{D}_{1}}{{D}_{1}}$ and ${{S}_{1}}{{S}_{1}}$ are the initial market demand curve and market supply curve, respectively. The initial equilibrium is established at point${{E}_{1}}$, where the market demand curve and the market supply curve intersects each other. Accordingly, the equilibrium price is $O{{P}_{1}}$ and the equilibrium quantity demanded is$O{{q}_{1}}$. Now, as the market demand of good X increases, this shifts the market demand curve parallely rightwards to ${{D}_{2}}{{D}_{2}}$ from${{D}_{1}}{{D}_{1}}$, while the market supply curve remains unchanged at${{S}_{1}}{{S}_{1}}$. This implies that at the initial price$O{{P}_{1}}$, there exist excess demand equivalent to ($Oq{{'}_{3}}-O{{q}_{1}}$) units. This excess demand will increase competition among the buyers and they will now be ready to pay a higher price to acquire more units of good. This will further raise the market price. The rise in   the price will continue till the market price becomes$O{{P}_{2}}$. The new equilibrium is established at point${{E}_{2}}$, where the new demand curve${{D}_{1}}{{D}_{1}}$ intersects the supply curve${{S}_{1}}{{S}_{1}}$ Observe that, at the new equilibrium both market price and quantity demanded are more than the initial equilibrium. The new equilibrium quantity supplied $O{{q}_{2}}$ and the new equilibrium price is$O{{P}_{2}}$. Hence, an increase in demand with supply remaining constant, results in rise in the equilibrium price as well as the equilibrium quantity. Or Suppose ${{D}_{1}}{{D}_{1}}$ and ${{S}_{1}}{{S}_{1}}$ are the initial market demand curve and market supply curve, respectively. The initial equilibrium is established at point${{E}_{1}}$, where the market demand curve and the market supply curve intersects each other. Accordingly, the equilibrium price is $O{{P}_{1}}$ and the equilibrium quantity demanded is$O{{q}_{1}}$. Now, assume that market demand increases (may be due to an increase in the consumer?s income). This shifts the market demand curve parallely rightwards to ${{D}_{2}}{{D}_{2}}$ from${{D}_{1}}{{D}_{1}}$, while the market supply curve remains unchanged at${{S}_{1}}{{S}_{1}}$. This implies that at the initial price$O{{P}_{1}}$, there exist excess demand equivalent to ($Oq{{'}_{3\,}}-O{{q}_{1}}$) units. This excess demand will increase competition among the buyers and they will now be ready to pay a higher price to acquire more units of good. This will further raise the market price. The rise in the price will continue till the market price becomes$O{{P}_{2}}$. The new equilibrium is established at point${{E}_{2}}$, where the new demand curve ${{D}_{2}}{{D}_{2}}$ intersects the supply curve ${{S}_{1}}{{S}_{1}}$. Observe that at the new equilibrium both market price and quantity demanded are more than the initial equilibrium. The new equilibrium quantity supplied $O{{q}_{2}}$ and the new equilibrium price is$OP2$. Hence, an increase in demand with supply remaining constant, results in rise in the equilibrium price as well as the equilibrium quantity. To summarise, Excess demand at the existing $\Rightarrow$ Competition among the buyers $\Rightarrow$ Rise in the price level $\Rightarrow$ new equilibrium $\Rightarrow$ Rise in both quantity demanded as well as price.