Question

Assume in a simple example that a change occurs in an economy that produces “Good X” and that there is a decrease in the number of sellers/producers in the economy who make “Good X”. Assume that this is a competitive market, what will happen to the equilibrium price and quantity of “Good X”? Use supply and demand analysis to demonstrate your answer and be sure to provide the rationale behind what is happening and also discuss any interesting observations or outcomes. Finally, please give an example from the news of a current event in real life that relates to the economic change affecting “Good X” above and be sure to explain why it relates.

(Note: The magnitude of any supply and/or demand shifts in this example are not specified; you may want to consider the magnitude of any shifts in your analysis).

Answer 1

If the number of sellers decrease in the economy who make good X and the demand of the good remains the same then the total quantity supplied in the market of good X will be less than its demand. Hence, the price of Good X increases to compensate the decrease in supply. This could seen through a following diagram:As the number of seller decreases total supply curve falls from S1 to S2 and quantity supplied decreases from Q1 to Q2

hence the price increases from P1 to P2 as the quantity demanded remains the same.

Thus, in a competitive market an decrease in supply leads to increase in prices but how much will be increased would depend on the elasticity of demand.

example: As we know that oil is most important for our daily lives and we regularly see how the oil market affects the oil prices..it happens most of the times that oil exporting countries reduce the supply of oil due to several reasons.

This decrease in quantity supplied raises the price of the oil world wide which affects the economy miserably. Less is supplied at higher prices. Hence,it creates excess demand situation in the economy driving the prices much higher.