In: Economics
Suppose the market is initially in equilibrium, and then demand decreases while supply decreases, the equilibrium price will _________ and the equilibrium quantity ______________ .
A.) Rise; will increase
B.) Rise; is ambiguous/indeterminate
C.) Drop; is ambiguous/indeterminate
D.) Ambiguous/indeterminate; will fall
D.Ambiguous/indeterminate; will fall
Market is in equilibrium at the point where demand curve intersect supply curve. In the panel a, demand and supply curve at E where equilibrium quantity is Q and price is P. D'D' and S'S' is the new decreased demand and supply curve, which intersect at E' where equilibrium quantity is Q' (has decreased) and price is P' (has increased). In the panel a magnitude of decrease in supply is greater than magnitude of decrease in demand, and in this case new equilibrium price increased and quantity has decreased.
In the panel b, magnitude of decrease in supply is equal to magnitude of decline is demand, as a result new equilibrium quantity has declined and price remains same.
In the panel c, magnitude of fall in demand is greater than magnitude of fall in supply, as a result new equilibrium price and quantity decreased.
THUS THE EQUILIBRIUM PRICE CAN BE RISE, FALL OR REMAIN SAME AS A RESULT OF FALL IN DEMAND AND FALL SUPPLY. IT DEPENDS ON THE MAGNITUDE OF FALL IN DEMAND AND SUPPLY CURVE
BUT EQUILIBRIUM QUANTITY WILL FALL ( FOR CERTAINLT) IRRESPECTIVE OF MAGNITUDE OF FALL IN DEMAND AND SUPPLY CURVE