Question

Suppose during the Coronavirus, video and movie streaming platforms such as Netflix, Amazon Prime and Hulu are showcasing more and better content. Suppose the market for streaming content can be analyzed by the model of supply and demand. In that market, there is an increase in the number of companies providing streaming content. At the same time, there is an increase in the demand for streaming content. How would the equilibrium price and the equilibrium quantity of streaming content be affected?

1. Equilibrium quantity decreases, but equilibrium price may go up or down

2. Equilibrium price increases, but equilibrium quantity declines

3. Equilibrium quantity increases, but equilibrium price may go up or down

4. Equilibrium price is unchanged, but equilibrium quantity declines

Answer 1

In a situation like this, both the demand and supply can be said to be moving in the same direction. This means that while demand is increasing on one hand, so is the supply for the service being provided. Here we can clearly judge that the overall equilibrium quantity would rise, as both sides i.e. the producers as well as the consumers are equally interested in consumption and production.

However, we cannot judge if the prices of the commodity would go up or down. This is because consumers would be willing to pay extra amount of money on one hand and on the other, suppliers would be tempted to keep the prices down to attract more customers in the wake of increase in demand.

The end result of price therefore, would depend on the relative size of these two changes as described above and as such can vary and cannot be determined of whether it may go up or down.

Thus, we can say the correct answer which satisfies our explanation above is option C)

All other options are incorrect as they say that price may be predicted as going up or down or the quantity may increase or decrease which is false.

Please feel free to ask your doubts in the comments section.