Question

Fill in the empty spaces in the two statements below and make sure they are consistent:

Fill in your answers in the response template:

a) A Shortage can be caused by a decrease in --Demand or Supply ( pick the right one)--------------. In which case the Price will -Rise or Fall --( Pick the right one ) ---------------and the equilibrium quantities will Rise or Fall --( Pick the right one )-------------(1.5)

b) Surplus can be caused by an decrease  in --Demand or Supply ( pick the right one)--------------. In which case the Price will -Rise or Fall --( Pick the right one ) ---------------and the equilibrium quantities will Rise or Fall --( Pick the right one )-------------(1.5)

Answer 1

a) Shortage can be caused by a decrease in supply. In which case the price will rise and the equilibrium quantities will fall; with a decrease in quantity supplied, the market demand will be more compared to the market supply. This rise in demand due to fall in supply would result in rise in prices. The rise in prices would hence, lead to a fall in quantity demanded as according to the law of demand, quantity demanded is inversely proportional to price of the good. Hence, the quantity demanded would keep falling until it reaches the new quantity supplied, thus, resulting in a fall in the equilibrium quantities.

b) Surplus can be caused by an decrease in demand. In which case the price will fall and the equilibrium quantities will fall; with a decrease in quantity demanded, the market demand will be less than the market supply. This surplus in the economy would result in fall in prices. The fall in prices would hence, lead to a fall in quantity supplied as price is directly proportional to quantity supplied. Hence, the quantity supplied would keep falling until it reaches the new quantity demanded, thus, resulting in a fall in the equilibrium quantity.