In the last discussion on the direct implication of the Supply and Demand laws; we saw how the increase in supply with a stagnant demand would lower the equilibrium price. In today’s section we come to the last direct implication of the Supply and Demand Law.
Building on the lemon sample again, let us makes the following assumptions - there was some pest which began affecting the lemons. So the general demand of 5 bags of lemons could not be satisfied and only 4 bags could be delivered. The demand was still for 5 bags of lemon by the day. Given this scenario, the vendor increased the price of each lemon; and the number of customers asking for this began dropping.
Analyzing this situation, we find that once the crop failed, the people who generally consume the lemons don’t immediately realize this and demand would remain the same. Since the supply would have dropped, the limited number of lemons now has a higher demand; hence price increases - only the people who would value the lemon more than the money they have in their pocket would go ahead and purchase which, while those who feel the lemons are not worth the higher price would not purchase it. The Rule therefore is - "If supply decreased and demand remains unchanged, then it leads to higher price and lower quantity."
Read in Kannada: http://somanagement.blogspot.com/2011/03/blog-post_22.html
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