Question

When supply rises and demund stays the same. (LO3) a) cquilibrium quantity riscs b) equilibrium quantity falls c) equilibrium quantity stays the same

Short answer

When supply rises and demand stays the same, the equilibrium quantity rises (a). This occurs because suppliers are willing to offer more of the product at a lower price, and consumers are willing to purchase more at the lower price, resulting in a new equilibrium point with a larger quantity supplied and a lower price.

Step-by-step solution

Understanding the Concepts of Supply, Demand, and Equilibrium

The equilibrium quantity is reached when the supply of a product matches the demand for it. In general, as the price of a product increases, the quantity supplied will increase, and the quantity demanded will decrease. Conversely, as the price of a product decreases, the quantity supplied will decrease, and the quantity demanded will increase. The point at which the supply and demand curves intersect is the equilibrium point.

Analyzing the Effect of Increased Supply

When the supply of a product increases, suppliers will generally offer more of the product at a lower price, assuming that the demand remains constant. As the supply curve shifts to the right, the intersection of the supply and demand curves will correspond to a new equilibrium point.

Comparing the New Equilibrium to the Original Equilibrium

With the new equilibrium point obtained after the increase in supply, we can compare the new equilibrium quantity to the original equilibrium quantity. If the new equilibrium quantity is greater than the original equilibrium quantity, then the equilibrium quantity has increased. If the new equilibrium quantity is equal to the original equilibrium quantity, then the equilibrium quantity remains the same. If the new equilibrium quantity is less than the original equilibrium quantity, then the equilibrium quantity has decreased.

Identifying the Correct Answer

In this scenario, when supply increases and demand remains the same, the intersection of the supply and demand curves will correspond to a new equilibrium point with a larger quantity supplied and a lower price. This is because suppliers are willing to offer more of the product at a lower price, and consumers are willing to purchase more at the lower price. As a result, the equilibrium quantity rises. Therefore, the correct answer is: a) Equilibrium quantity rises

Key concepts

Supply and Demand

Understanding supply and demand is fundamental when delving into how markets operate. This concept describes how the availability of a product (supply) and the desire for that product (demand) influence its price and the quantity available in the market.

Supply refers to how much of a product or service is available to consumers, whereas demand indicates the amount people are willing to buy at a certain price. These concepts are often graphically represented by two curves on a price-quantity graph. The supply curve typically slopes upwards, showing that higher prices incentivize producers to offer more of the product. The demand curve, on the other hand, tends to slope downwards, indicating that consumers will buy less of a product if its price goes up.

When the amount that consumers want to buy equals the amount that producers want to sell, the market is said to be in equilibrium. This scenario is ideal because there is no surplus or shortage of products. The price at this point ensures that the quantity supplied is perfectly consumed by the market demand.

Equilibrium Point

The equilibrium point in the context of supply and demand represents the moment where the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers. At this juncture, the market price stabilizes, and there is no inherent tendency for it to change unless disrupted by external factors.

When an exercise asks you about changes to this equilibrium, it's crucial to envision both the supply and demand curves shifting in response to external influences – like a change in consumer preferences, production costs, or other market dynamics. For example, if a problem indicates that supply rises while demand stays the same, you'd shift the supply curve rightward, indicating more availability of the product at each price point. This shift leads to a new equilibrium, usually at a lower price and a higher quantity sold, as producers are willing to sell more at each price point than before.

Price Elasticity

The concept of price elasticity measures how responsive the quantity demanded of a product is to a change in its price. It's a critical factor that can intensify or dampen the effects of supply and demand shifts.

Price elasticity can be elastic, where a small price change causes a significant change in quantity demanded, or inelastic, where quantity demanded is less responsive to price changes. Products that are necessities tend to have inelastic demand, whereas luxury items often have more elastic demand.

For instance, if the price of an essential medication decreases slightly, the quantity demanded may not increase by much, as demand for such medication is relatively constant. Conversely, if the price for an upscale dining experience drops, the quantity of people willing to purchase that experience might increase substantially due to the elastic nature of such a luxury service. In textbook exercises, understanding the elasticity of products can help you predict changes in equilibrium quantity and price more accurately when the supply shifts.