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Demand And Supply

Demand and Supply

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Demand and Supply

There is a large earthquake in a city. Some roads are destroyed, and people need more bottled water because pipelines are damaged. Use a supply and demand curve to show what happens to the price and quantity of bottled water in this city. Show with graph and explain

The damage of pipelines significantly reduces piped water in the town. Since water is a basic need, people will have to shift to bottled water. According to the law of demand and supply, an increase in demand for bottled water results in an increase in price. Since water is an inelastic product, people will continue to buy despite the rise in price, and this increases supply in the short run.

From the above graph, an increase in demand for bottled water from D1 to D2 results in to increase in quantity supplied from Q1 to Q2. Consequently, price increases from P1 to P2. The overall equilibrium point shifts from EO to E1. All the above changes happen in the short run, while in the long run, things might be a little bit different. Due to the increase in prices, the existing bottle companies enjoy supernormal profits that may attract new entries in case of free-market entry. Entry of new investors increases bottled water supply to meet the demand level. A shift in supply curve from left to right may be realized in the long run. Substantially, the forces of demand and supply change accordingly until market equilibrium is reached in the long run.

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