Question

A decrease in demand while supply remains unchanged will lead to (LO3) a) an increase in equilibrium price and quantity b) a decrease in equilibrium price and quantity c) an increase in equilibrium price and a decrease in equilibrium quantity d) a decrease in equilibrium price and an increase in cquilibrium quantity

Short answer

The short answer to the question is: A decrease in demand while supply remains unchanged will lead to \(b)\) a decrease in equilibrium price and quantity.

Step-by-step solution

Understand the concept of supply and demand

Supply and demand are the basic principles of economics that explain the interaction between the sellers and buyers to determine the price and quantity of a product or service in the market. In general, an increase in demand results in higher prices and higher quantities, while a decrease in demand leads to lower prices and lower quantities.

Analyzing the equilibrium price and quantity

Equilibrium price and quantity occur when the quantity demanded by the consumers is equal to the quantity supplied by the producers. This is the point where the supply and demand curves intersect. If there is a change in any of the factors affecting demand or supply, while the other remains constant, then the equilibrium price and quantity will change accordingly.

Analyze each option given in the exercise

We will now go through each of the options and determine their correctness based on the given scenario: a) An increase in equilibrium price and quantity - This is not correct as we are given that the demand decreases, which will lead to lower prices and lower quantities. b) A decrease in equilibrium price and quantity - This could be the correct choice, as a reduction in demand while supply remains unchanged would lead to lower prices and lower quantities, thereby reducing the equilibrium price and quantity. c) An increase in equilibrium price and a decrease in equilibrium quantity - This is not correct, as a decrease in demand would not result in an increase in equilibrium price. d) A decrease in equilibrium price and an increase in equilibrium quantity - This is not correct, as a decrease in demand would lead to lower prices and lower quantities, not higher quantities.

Choose the correct option

Based on our analysis, the correct option is: b) A decrease in equilibrium price and quantity.

Key concepts

Equilibrium Price

The equilibrium price in a market is a central concept in economics. It represents the price at which the quantity of a product demanded by consumers is exactly equal to the quantity supplied by producers. This balance ensures that there is no excess supply or unmet demand in the market. When both demand and supply are in perfect harmony, the price at this point is called the equilibrium price.

Imagine this as a seesaw perfectly balanced by two people of equal weight: they are neither rising nor falling. In the context of markets, when demand decreases but supply remains constant, the equilibrium shifts. The seesaw tips, leading to a new equilibrium price. The decrease in demand causes the quantity of product desired by consumers to drop, and usually, the price adjusts downward to reach a new balance.

• When demand decreases, equilibrium price typically falls.
• Market forces work to adjust prices until equilibrium is restored.
• External factors such as consumer trends or economic conditions can influence demand.

Equilibrium Quantity

Equilibrium quantity refers to the number of goods or services which are both produced and purchased at the equilibrium price. In simpler terms, it's the number of a product that qualifies as the most beneficially exchanged in a marketplace.

This point is reached when the intentions of consumers align with the intentions of producers. For example, when demand decreases and the supply is unchanged, there is an excess supply at the initial equilibrium price, leading to a reduction in both equilibrium price and quantity. Producers might lower the price to sell off surplus stock, which can eventually result in the market reaching a new equilibrium at a lower quantity.

• The equilibrium quantity will reduce if demand decreases while supply remains unchanged.
• Price adjustments help clear any surplus or shortages in the market.
• Supply remaining unaltered while demand shifts often results in new market equilibriums.

Market Interactions

Market interactions are the dynamics between buyers' demand and sellers' supply. These interactions determine key market features such as price levels and trade quantities. Each participant in the market, whether they are a consumer or producer, plays a role in shaping how the market operates.

When demand shifts, as in the case of a decrease with static supply, it sets off a sequence of interactions that adjust the market back to equilibrium. The sellers must decide on new prices to stimulate demand and clear their inventory. At the same time, buyers may alter their willingness to purchase based on the adjusted prices.

• Market interactions combine buyer preferences and seller capacities.
• Adjustment in demand often necessitates a shift in price for market reequilibrium.
• Surplus or scarcity informs pricing strategies and economic adjustments.

Understanding these interactions can better equip you to predict market changes and prepare for economic shifts.