Question

Say whether each of the following changes will increase or decrease the equilibrium price and quantity, or whether the effect cannot be predicted. \([\mathrm{LO} 3.7]\) a. Demand increases; supply remains constant. b. Supply increases; demand remains constant. c. Demand decreases; supply remains constant. d. Supply decreases; demand remains constant. e. Demand increases; supply increases. f. Demand decreases; supply decreases. g. Demand increases; supply decreases. h. Demand decreases; supply increases.

Short answer

a. Price & quantity increase; b. Price decreases, quantity increases; c. Price & quantity decrease; d. Price increases, quantity decreases; e. Quantity increases, price indeterminate; f. Quantity likely decreases, price indeterminate; g. Price increases, quantity indeterminate; h. Price decreases, quantity indeterminate.

Step-by-step solution

Analyze Situation 'a'

For the scenario where demand increases while supply remains constant, we apply basic demand-supply analysis. An increase in demand shifts the demand curve to the right. Since supply is unchanged, the new equilibrium is at a higher price and quantity. Hence, equilibrium price increases, and equilibrium quantity increases.

Analyze Situation 'b'

When supply increases and demand remains constant, the supply curve shifts to the right. Demand, being unchanged, stays in place. This results in a decrease in equilibrium price and an increase in equilibrium quantity. Thus, equilibrium price decreases, and equilibrium quantity increases.

Analyze Situation 'c'

In this scenario, demand decreases while supply is constant. The demand curve shifts to the left. With supply unchanged, the equilibrium moves to a lower price and quantity. Hence, both the equilibrium price and quantity decrease.

Analyze Situation 'd'

Here, supply decreases with constant demand. The supply curve shifts to the left. This leads to a higher equilibrium price and a lower equilibrium quantity due to less availability of the goods. Equilibrium price increases, and equilibrium quantity decreases.

Analyze Situation 'e'

Both demand and supply increase. This results in both curves shifting to the right. Typically, the effect on price is indeterminate without knowing the magnitudes of shifts. Quantity, however, definitely increases as both increase. Thus, equilibrium quantity increases while the effect on equilibrium price is indeterminate.

Analyze Situation 'f'

Both demand and supply decrease, causing both curves to shift left. The effect on quantity is less clear without specific magnitudes, though it generally decreases. The price effect is indeterminate, leaving equilibrium quantity likely decreasing with an uncertain price change.

Analyze Situation 'g'

Demand increases while supply decreases. With demand shifting right and supply shifting left, price will definitely increase due to simultaneous forces of higher demand and lower availability. However, the quantity effect is indeterminate without specific shift sizes.

Analyze Situation 'h'

Demand decreases and supply increases, shifting the demand curve left and supply curve right. Price will decrease due to lower demand and more supply, though the effect on quantity is uncertain without shift sizes.

Key concepts

Demand and Supply Analysis

Understanding the interaction between demand and supply is essential for analyzing how market forces affect the equilibrium price and quantity of goods. The equilibrium is the point where the quantity demanded equals the quantity supplied. If any factor causes these curves to shift, there will be a new equilibrium. When there is a shift in demand or supply, it changes the balance of the market: - **Increase in Demand:** Causes the demand curve to shift rightward. This typically results in a higher equilibrium price and quantity. - **Increase in Supply:** Causes the supply curve to shift rightward, generally leading to a lower equilibrium price and a higher equilibrium quantity. - **Decrease in Demand:** Shifts the demand curve leftward, resulting in a lower equilibrium price and quantity. - **Decrease in Supply:** Shifts the supply curve leftward, often causing an increase in equilibrium price and a decrease in quantity. It's important to note the sizes of these shifts can sometimes result in indeterminate outcomes for price or quantity.

Demand Curve

The demand curve represents the relationship between the price of a good and the quantity demanded by consumers. It is usually downward sloping, showing that as prices decrease, consumers are willing to purchase more, and as prices rise, they purchase less. Factors that can cause the demand curve to shift include: - **Consumer Preferences:** If a good becomes more fashionable or desirable, the demand curve shifts right. - **Income Changes:** Generally, an increase in consumer income shifts the demand curve rightward for normal goods. - **Prices of Related Goods:** A decrease in the price of complementary goods can increase demand, shifting the curve right. An increase in the price of substitutes can have a similar effect. When analyzing market changes, recognizing which factors are driving shifts in demand can clarify why certain adjustments in equilibrium occur.

Supply Curve

The supply curve indicates the relationship between the price of a good and the amount producers are willing to supply. It is typically upward sloping, indicating that at higher prices, producers are more willing to increase supply. Key factors influencing shifts in the supply curve include: - **Production Costs:** An increase in production costs causes the supply curve to shift leftward, raising prices and lowering quantities. - **Technological Advances:** Improvements in technology can shift the supply curve right by reducing production costs and increasing output. - **Number of Suppliers:** More suppliers entering the market can shift the supply curve rightward. Understanding shifts in the supply curve helps explain changes in market equilibrium and the resulting implications for producers and consumers alike.

Shift in Demand and Supply

Shifts in demand and supply curves are crucial in predicting changes in market equilibrium. A shift occurs due to factors external to the price of the good itself, influencing either supply, demand, or both. - **Shifts in Both Curves:** When both curves shift, the direction of the shift will determine the impact on equilibrium price and quantity. If both demand and supply increase, quantity will certainly increase, but the effect on price will depend on the relative magnitudes of the shifts. - **Opposing Shifts:** If demand increases while supply decreases, equilibrium price will definitely rise, but the change in equilibrium quantity is uncertain without knowing the shifts' magnitudes. Conversely, if demand decreases and supply increases, the equilibrium price will fall, but the quantity effect is indeterminate. These shifts provide powerful insights into potential market developments and help businesses strategize accordingly.