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Suppose the market for Good X is in equilibrium. Explain the chain effect, if: 

(a) increase in market demand is less than the decrease in market supply. 

(b) increase in market demand is more than the increase in market supply.

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Market equilibrium is determined at a point where market demand is equal to market supply. 

(a) When increase in market demand is less than decrease in market supply 

Chain effect: Relative increase in market demand is less than relative increase in market supply. It is a situation of excess supply. There will be competition among the sellers, to clear the unsold stock which will result in reduction in price. 

This process will continue till new equilibrium point is attained. Equilibrium quantity will increase and the equilibrium price will decrease in the market. 

(b) Increase in the market demand is more than increase in market supply. 

Chain effect: Relative increase in market demand is greater than relative increase in market supply. It is a situation of excess demand. There will be competition among the buyers which will result in rise in price. 

This process will continue till new equilibrium point is attained. Equilibrium quantity and equilibrium price will increase in the market. 

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