Question

An increase in supply while demand remains unchanged will lead to _____. a) an increase in equilibrium price and a decrease in equilibrium quantity b) a decrease in equilibrium price and a decrease in equilibrium quantity c) an increase in equilibrium price and an increase in equilibrium quantity d) a decrease in equilibrium price and an increase in equilibrium quantity

Short answer

(d) a decrease in equilibrium price and an increase in equilibrium quantity

Step-by-step solution

Understanding the terms

Before we get into the problem, let's clarify some important concepts: - Equilibrium price: The price at which the quantity supplied by producers equals the quantity demanded by consumers. - Equilibrium quantity: The quantity of goods or services supplied and demanded at the equilibrium price. - Supply: The quantity of goods or services that producers are willing and able to offer at different market prices. - Demand: The quantity of goods or services that consumers are willing and able to buy at different market prices.

Analysing the effect of an increase in supply while demand remains unchanged

When supply increases, the supply curve shifts to the right, meaning that the quantity supplied at each price level will increase. Since the demand is unchanged, the demand curve stays in the same position. To find the new equilibrium point, we need to identify the point where the new supply curve intersects the original demand curve.

Changes to equilibrium price and equilibrium quantity

As a result of the increase in supply while demand remains unchanged, the equilibrium point moves to a lower price level and a higher quantity level. This is because, as supply increases, there are more goods available at each price, leading to a fall in the equilibrium price in order to clear the market. Consequently, as the price falls, consumers are willing and able to buy more goods, which results in an increase in the equilibrium quantity. Based on our analysis, we can determine the correct option that reflects these changes to the equilibrium price and equilibrium quantity: - a) an increase in equilibrium price and a decrease in equilibrium quantity (Incorrect) - b) a decrease in equilibrium price and a decrease in equilibrium quantity (Incorrect) - c) an increase in equilibrium price and an increase in equilibrium quantity (Incorrect) - d) a decrease in equilibrium price and an increase in equilibrium quantity (Correct) Hence, the correct answer is: **(d) a decrease in equilibrium price and an increase in equilibrium quantity**

Key concepts

Supply and Demand

In microeconomics, understanding supply and demand is fundamental. These two forces tell the story of the market and how prices are determined.
Supply refers to how much of a good or service the producers are willing to supply at a given price. The higher the price, the more producers are likely to supply.
Demand, on the other hand, represents how much of a good or service consumers are willing and able to purchase at a given price. The lower the price, the more consumers are likely to buy. Supply and demand interact in the marketplace to determine prices.

• When supply increases and demand remains constant, like in our exercise, producers have more of the good which tends to lower prices to attract consumers.
• If demand increases while supply remains constant, the situation reverses, and prices tend to rise.

Both changes in supply and demand can be visualized using graphs. These graphs help us see shifts that lead to new equilibrium prices and quantities.

Equilibrium Price

The equilibrium price is a central concept in economics where the supply and demand curves intersect. At this point, the quantity of goods supplied equals the quantity demanded.
It's the "just right" price that balances the two forces without creating a surplus (too much supply) or a shortage (not enough supply). When there are changes in the market:

• An increase in supply (with no change in demand) typically leads to a decrease in the equilibrium price.
• Conversely, an increase in demand (with no change in supply) often results in a higher equilibrium price.

Market equilibrium helps businesses and consumers determine the best strategies for selling or purchasing goods. It's that magical point where both parties are happy – producers sell all they are willing to at a given price, and consumers buy as much as they want.

Equilibrium Quantity

Equilibrium quantity is the quantity of goods or services that finds a sweet spot where supply equals demand at the equilibrium price. It's the actual amount of product exchanged in the market.
When supply and demand change, the equilibrium quantity also adjusts to reflect the new balance. In situations like an increase in supply, where demand remains unchanged:

• The equilibrium quantity increases, as more goods are supplied at a lower price.
• This encourages more buy-in from consumers, essentially clearing the market at the new lower price.

The equilibrium quantity tells us not just about price, but how many products are effectively distributed in the market. It reflects economic efficiency at its best, meaning resources are used in a way where goods are shared most effectively.