Chapter 3: Demand and Supply Equilibrium

Graphically show the effect of each of the following on Equilibrium Price and Quantity. Also explain which
factor of demand or supply is being affected in each case:

a) If government withdraws tax on cigarettes, how will it affect the equilibrium price and quantity of
cigarettes?

b) If government withdraws subsidy on electricity, how will it affect the equilibrium price and quantity of
electricity?

c) What happens to the equilibrium “Salary” of teachers and the “Number of teachers hired” when number of
private universities increase?

d) What happens to the equilibrium price and quantity of ice cream in winter?

e) What happens to equilibrium price and quantity of chocolates on Valentine’s day?

Instructions:

- Step 1: Label the x-axis and y-axis with the name of the good mentioned in the question.

- Step 2: Draw a downward sloping Demand Curve (label the demand curve D 1)

- Step 3: Draw an upward sloping Supply Curve (label the supply curve S1)

- Step 4: Using a dotted-line, Label the Equilibrium Price: P1

- Step 5: Using a dotted-line, Label the Equilibrium Quantity: Q 1

- Step 6: Read the question again. See if the Demand Curve should shift OR the Supply Curve should shift.

- Step 7: Shift the appropriate curve in the required direction (right or left)

- Step 8: Mark the shift with a right arrow (if rightward shift) OR left arrow (if leftward shift)

- Step 9: Using a dotted-line, Label the New Equilibrium Price: P2

- Step 10: Using a dotted-line, Label the New Equilibrium Quantity: Q2

- Step 11: Use an Upward Arrow to show if there has been an Increase in Price; Use a Downward Arrow to
show if there has been a Decrease in Price

- Step 12: Use a Rightward Arrow to show if there has been an Increase in Quantity; Use a Leftward Arrow to
show if there has been a Decrease in Quantity.

- Step 13: Below the Graph, write down the “Factor of Demand” (if the Demand Curve has shifted) OR write
down the “Factor of Supply” (if the Supply Curve has shifted).