Question

An increase in the supply of running shoes willassuming demand is unchanged- lead to __________ (LO7) a) an increase in equilibrium price and an increase in equilibrium quantity b) a decrease in equilibrium price and a decrease in 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

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

Step-by-step solution

Reviewing the basics of Supply and Demand

Supply is the quantity of a good or service that producers are willing to offer at various prices. Demand is the quantity of a good or service that consumers are willing to purchase at different prices. When the quantity supplied equals the quantity demanded, we have an equilibrium point, which is defined by its equilibrium price and quantity.

Analyzing the impact of an increase in supply

Let us assume there is an increase in the supply of running shoes, while demand remains constant. When the supply increases, suppliers are willing to sell more running shoes at a lower price. Since consumers still have the same demand for running shoes, they will buy more running shoes at these lower prices, until a new equilibrium point is reached.

Finding the correct answer

Now we need to find out how the equilibrium price and quantity change when supply increases and demand remains constant. Given the scenarios: a) an increase in equilibrium price and an increase in equilibrium quantity b) a decrease in equilibrium price and a decrease in 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 We can eliminate options a) and c) because an increase in supply would lead to a decrease in equilibrium price, not an increase. Between options b) and d), the correct answer is d) a decrease in equilibrium price and an increase in equilibrium quantity. This is because, with an increase in supply, suppliers are willing to sell shoes at a lower price, leading to a decrease in the equilibrium price. Consumers will buy more shoes at these lower prices, resulting in an increase in equilibrium quantity.

Key concepts

Equilibrium Price

When discussing the equilibrium price, we refer to the particular price point at which the quantity of a product that consumers want to buy matches exactly with the quantity that producers want to sell. This magical point ensures there's neither surplus nor shortage in the market.

• A surplus happens when the price is too high and suppliers produce more than what consumers want to buy.
• A shortage occurs when the price is too low, causing consumers to want more than what is available.

The equilibrium price adjusts when there are shifts in supply or demand. For example, if the supply of running shoes increases, suppliers are willing to sell more pairs at any given price. To achieve market balance again, prices tend to go down, enticing more consumers to make a purchase, thus reaching a new equilibrium price that's lower than before.

Equilibrium Quantity

Equilibrium quantity is the amount of a product that is bought and sold at the equilibrium price. This is the optimal point where market supply and demand balance each other precisely.

When changes occur in the market, such as an increase in supply with constant demand, the equilibrium quantity shifts. More products being available at lower prices entice consumers to purchase more.

• With more running shoes supplied and prices decreased, the equilibrium quantity increases.
• More consumers can afford, or are willing, to buy additional pairs because of the lower prices.

Thus, understanding how equilibrium quantity adjusts helps in predicting market behaviors. When supply increases, consumers end up buying more than before, indicating a higher equilibrium quantity.

Market Equilibrium

Market equilibrium represents the overall state when supply and demand are balanced, creating ideal conditions where resources are allocated efficiently.

In this balance:

• The market sets an equilibrium price, ensuring no excess or shortage of goods.
• An equilibrium quantity results, indicating the number of products that are bought and sold most efficiently.

With any external changes, such as adjustments in supply or demand, market equilibrium reacts and moves. The new conditions drive a different equilibrium price and quantity to re-stabilize the market.

For instance, an increase in the supply of a product like running shoes, without a change in demand, initially disrupts the balance but settles at a new point: lower equilibrium prices and higher quantities available for sale. Understanding market equilibrium is crucial for anticipating these shifts and the responses of consumers and producers.