Suppose several consumers and producers both enter a market. Can we be certain about the change in price (increase or decrease)?

Suppose several consumers and producers both enter a market. Can we be certain about the change in price (increase or decrease)? Can we be certain about the change in quantity (increase or decrease)? Briefly explain.

Solutions

Expert Solution

When several consumers enter the market, the demand for goodwill increases which at a given price level will create a shortage in the market. This will increase the equilibrium price level and quantity in the market.

When several producers enter the market, the supply of the goods increases which at a given price creates a surplus. So, the equilibrium price decreases while the equilibrium quantity increases.

Thus, both the above effects will increase the quantity unambiguously but a change in price is uncertain and depends on the relative size of the increase in demand and supply of the good.

Rahul Sunny answered 1 year ago

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