Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 28

'An increase in demand will raise a good's price and a fall in demand will lower it. That is all you need to know-general equilibrium analysis is largely unnecessary.'' Do you agree? How would you use Figure to show how changes in demand affect price? Would using this figure tell you more than would using a simple supply-demand diagram?
With an arbitrary initial price ratio, firms will produce X1, Y1; the economy's budget constraint will be given by line CC. With this budget constraint, individuals demand X01 , Y1, that is, there is an excess demand for good X (X01_ X1) and an excess supply of good Y (Y1 _ Y01 ). The workings of the market will move these prices toward their equilibrium levels P_X ,P_Y. At those prices, society's budget constraint will be given by the line C*C*, and supply and demand will be in equilibrium. The combination X*, Y* of goods will be chosen, and this allocation is efficient.