Question

Which of the following statements is true? a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity. b. An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity. c. A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity. d. All of the above are true.

Short answer

a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity.

Step-by-step solution

Statement a: An increase in demand, with no change in supply, will increase the equilibrium price and quantity.

When demand increases and supply remains the same, buyers are willing to pay a higher price for the good or service. This means the demand curve shifts to the right. As a result, the price and quantity at which demand equals supply (equilibrium point) also increases. So, statement a is true.

Statement b: An increase in supply, with no change in demand, will decrease the equilibrium price and the equilibrium quantity.

When the supply increases and demand remains the same, this means producers are willing to sell more goods or services at each price level. Consequently, the supply curve shifts to the right. The equilibrium point (where the quantity demanded equals quantity supplied) moves down the demand curve, resulting in a lower equilibrium price and a higher equilibrium quantity. So, statement b is false.

Statement c: A decrease in supply, with no change in demand, will decrease the equilibrium price and increase the equilibrium quantity.

When the supply decreases and demand remains the same, producers are willing to sell fewer goods or services at each price level. This means the supply curve shifts to the left. The equilibrium point then moves up the demand curve, resulting in a higher equilibrium price and a lower equilibrium quantity. So, statement c is false. As only statement a is proven to be true, the correct answer to the exercise is: a. An increase in demand, with no change in supply, will increase the equilibrium price and quantity.

Key concepts

Demand and Supply

In economics, demand and supply are foundational concepts that determine the dynamics of any market. Demand refers to the amount of a product or service consumers are willing and able to purchase at different price levels. Supply, on the other hand, is the quantity of a product or service that producers are willing and able to sell at various price points.

Both demand and supply are depicted graphically using demand and supply curves. The demand curve typically slopes downwards from left to right, illustrating that as prices fall, the quantity demanded increases. Conversely, the supply curve usually slopes upwards, indicating that as prices rise, producers are keen to supply more.

It's crucial to understand that when we talk about movements in demand or supply, we're looking at shifts of the entire curve rather than slides along the curve itself. For instance, an increase in demand shifts the demand curve to the right, while a decrease shifts it to the left. Similarly, an increase in supply results in a rightward shift of the supply curve, and a decrease causes it to shift left.

Equilibrium Price

The equilibrium price in a market is the price at which the quantity of a good demanded by consumers equals the quantity supplied by producers. This balance occurs naturally in a free market, where neither surplus nor shortage exists.

At equilibrium, the market is said to be "cleared," meaning all products produced are sold, and consumers can purchase their desired quantity without excess demand. This point is graphically represented by the intersection of the demand and supply curves.

If the demand increases, causing the demand curve to shift rightward and assuming supply remains constant, it will lead to a higher equilibrium price. On the other hand, if supply increases, leading to a rightward shift in the supply curve with constant demand, the equilibrium price falls. Thus, the equilibrium price fluctuates based on changes in either market demand or supply conditions.

Equilibrium Quantity

Equilibrium quantity is the quantity that corresponds to the equilibrium price, where the amount consumers want to buy equals the amount producers want to sell. At this point, the market reaches a state of balance.

When demand in the market increases, shifting the demand curve to the right, and if the supply remains unchanged, not only does the equilibrium price rise, but the equilibrium quantity also increases. This is because more consumers are willing and able to buy the product at the new price level.

Conversely, an increase in supply while holding demand steady causes the equilibrium quantity to rise as more of the product is available and sold in the market, but it leads to a decrease in the equilibrium price. The equilibrium quantity is a dynamic figure that adjusts to reflect the most efficient level of market transactions given current price levels, demand, and supply.