Question

How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts?
a. supply decreases and demand is constant.
b. demand decreases and supply is constant.
c. supply increases and demand is constant.
d. demand increases and supply increases.
e. demand increases and supply is constant.
f. supply increases and demand decreases.
g. demand increases and supply decreases.
h. demand decreases and supply decreases.

Answer 1

Answer:

a. Equilibrium price rises but equilibrium quantity falls.

b. Equilibrium price falls and equilibrium quantity also falls.

c. Equilibrium price falls but equilibrium quantity rises.

d. Equilibrium price is indeterminate but equilibrium quantity rises.

e. Equilibrium price rises and equilibrium quantity also rises.

f. Equilibrium price falls but equilibrium quantity is indeterminate.

g. Equilibrium price rises but equilibrium quantity is indeterminate.

h. Equilibrium price is indeterminate but equilibrium quantity falls.

Explanation:

In theory of demand and supply, the following are the simple rules used to determine the effects of changes demand and supply on equilibrium price and quantity:

1. When there is a change in demand but supply does not change, the direction of changes in both the equilibrium price and equilibrium quantity will be the same.  

2. When there is a change in supply but demand does not change, direction of changes in both the equilibrium price and equilibrium quantity will be opposite.

3. If both the demand and supply change in the opposite direction, it is possible to determine the change in the equilibrium prices while the change in the equilibrium quantity will be indeterminate because they depend on the magnitudes of the shifts.

3. If both the demand and supply change in the the same direction, it is possible to determine the change in the equilibrium quantity while the change in the equilibrium price will be indeterminate because they depend on the magnitudes of the shifts.