Answer
With reference to the diagram, an increase in demand would result in a rightward shift in the demand curve from Dd0 to Dd1, and this would create a upward pressure on price, as prices serve as a signal to producers that the demand of the good is increasing, and serves as an incentive for them to increase the quantity supplied to meet this increase in demand. Thus, there is an increase in price from P0 to P1, with the equilibrium quantity increasing from Q0 to Q1 . If the price does not rise under the demand and supply conditions, there would be a shortage of Q2-Q0 as shown in the diagram, as the quantity demanded would be Q2 and quantity supplied at Q0.
Work Step by Step
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