Question

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

Short answer

b) a decrease in equilibrium price and equilibrium quantity

Step-by-step solution

Understand the concept of market equilibrium

- Market equilibrium is a state where the quantity demanded by consumers is equal to the quantity supplied by producers. This equal state creates the equilibrium price and equilibrium quantity. The interaction of supply and demand curves determines the equilibrium in a market.

Analyze the effects of a decrease in demand on the market

- When the demand for a good decreases, the demand curve shifts to the left. As a consequence, the quantity demanded at each price level decreases. However, the supply curve remains unchanged because the supply remains the same.

Determine the new equilibrium

- The new equilibrium is reached where the new demand curve intersects with the supply curve. Since the new demand curve is shifted to the left, the equilibrium price will be lower and the equilibrium quantity will be smaller than before.

Match the results with the answer choices

- Comparing the consequences of a decrease in demand with the answer choices provided, the correct answer is: b) a decrease in equilibrium price and equilibrium quantity

Key concepts

Demand and Supply

The concepts of demand and supply form the cornerstone of market economics. Demand refers to how much of a product or service consumers are willing and able to purchase at different price levels.
Supply, on the other hand, represents how much the market can offer; it is the quantity of a product or service that producers are willing and able to sell at various prices.

• Demand Curve: This is a graphical representation showing how the quantity demanded varies with price. Typically, it slopes downwards from left to right, indicating that as price decreases, demand increases (and vice versa).
• Supply Curve: This illustrates how the quantity supplied changes with price. Usually, it slopes upwards from left to right, meaning as price increases, suppliers provide more of the product.

The intersection of the supply and demand curves determines the market equilibrium, establishing the equilibrium price and quantity.

Equilibrium Price

The equilibrium price is where the supply of goods matches demand. This balance ensures that the market clears, meaning there are no surpluses or shortages.
When a market is at equilibrium, all consumers willing to buy at that price can find a seller, and all producers willing to sell can find a buyer. It's the point where the supply and demand curves intersect on a graph.

• The equilibrium price adjusts based on shifts in demand or supply. For instance, if demand decreases while supply remains constant, as in the original exercise, the equilibrium price will fall.
• A drop in demand reduces the willingness to pay, leading producers to lower prices in a bid to encourage sales and clear existing inventory.

This dynamic process constantly adjusts prices up or down until an equilibrium is found.

Equilibrium Quantity

Equilibrium quantity is the amount of goods or services that are bought and sold at the equilibrium price. It reflects the market quantity when demand meets supply perfectly.
In a stable market environment, changes in either demand or supply will result in a new equilibrium quantity.

• If demand decreases and supply remains unchanged, as in the example exercise, the equilibrium quantity will drop.
• Producers will be less willing to produce at lower price points, which results in fewer goods being available in the market.

Understanding equilibrium quantity helps in predicting how many units will be sold and produced when the market is balanced at a given price.