Question

Use one graph to show the shift in demand and another graph to show the shift in supply. Compare the change in price in the two graphs. See if they are consistent in that both graphs suggest the same outcome for price, or not. Make the same comparison of the two graphs for quantity. If the supply and demand for a product both decrease, then equilibrium:

A:Quantity must fall and equilibrium price must rise.

B:Price must fall, but equilibrium quantity may rise, fall, or remain unchanged.

C:Quantity must decline, but equilibrium price may rise, fall, or remain unchanged.

D:Quantity and equilibrium price must both decline.

Answer 1

Graph to show shift in demand-

The above diagram shows a shift of the Demand curve. D and S are the initial demand and supply curves respectively. E is the initial equilibrium point, P is the initial price and Q is the initial equilibrium quantity. A decrease in demand will lead to a a shift of the demand curve to the left. As such the demand curve will shift to D1. The new equilibrium point is A where initial supply curve and new demand curve intersect. The new equilibrium price will fall to P1 and new equilibrium quantity will fall to Q1. Hence, a decrease in the Demand causes the demand curve to shift to the left and both equilibrium price and quantity will fall.

Graph showing shift of the supply-

The above diagram shows a shift of the supply curve. D and S are the initial demand and supply curves respectively. E is the initial equilibrium point, P is the initial equilibrium price and Q is the initial equilibrium quantity. A decrease in the supply will lead to a a shift of the supply curve to the left. As such, supply curve will shift to S1. The new equilibrium point is A where new supply curve and original demand curve will intersect. Equilibrium price will rise to P1 and equilibrium quantity will fall to Q1. Hence, a decrease in the supply causes the supply curve to shift to the left and equilibrium price rises and equilibrium quantity falls.

Comparison of the above two graphs-

Price-A shift of the Demand curve to the left( decrease in demand) leads to fall in the equilibrium price while a shift of the supply curve to the left ( decrease in supply) leads to an increase in the equilibrium price.

Quantity- A shift of the Demand curve and supply curve to the left ( decrease in the Demand and decrease in supply ) leads to fall in the equilibrium quantity.

.Q..If supply and demand for a product both decrease, then equilibrium-

answer-option C. Quantity must decline, equilibrium price may rise, fall or remain unchanged.

When both demand and supply decrease, equilibrium quantity must decline as both quantity demanded by buyers and quantity supplied by supplier has reduced. Equilibrium price may rise, fall or remain unchanged depending upon the relative change in demand and supply. If demand and supply decrease in same proportion, the equilibrium price remains the same. If decrease in demand is less than decrease in supply , equilibrium price will rise. If decrease in demand is more than decrease in supply, equilibrium price will fall.

A graph showing 3 cases where equilibrium price change depends upon relative change in demand and supply is shown below-

Case1: Equilibrium price remains the same-

Case 2 :Equilibrium price rises-

Case 3: Equilibrium price falls-

From the above three cases we can clearly see that equilibrium quantity must decline, equilibrium price may rise, fall or remain unchanged.

Option A is incorrect because when both demand and supply decrease, equilibrium price may rise, fall or remain unchanged. It is not necessary equilibrium price will rise.

Option B is incorrect because when both demand and supply decrease, equilibrium quantity will always fall as both quantity demanded and quantity supplied has reduced. Equilibrium quantity cannot rise or remain unchanged.

Option D is incorrect because equilibrium price may or may not decline.