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Take a simultaneous decrease in supply and demand curves and discuss what happens to the price...

Take a simultaneous decrease in supply and demand curves and discuss what happens to the price and quantity now. Be thorough in your explanations. Use graphs to help illustrate your answer.

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Answer #1

When supply decreases, supply curve shifts leftward, increasing price and decreasing quantity. At the same time, when demand decreases, demand curve shifts leftward, decreasing both price and quantity. As a result, quantity definitely decreases. But net effect on price is indeterminate. Price may increase, decrease or remain unchanged based on relative magnitude of shifts in demand and supply curves.

In following graph, D0 & S0 are initial demand & supply curves intersecting at point A with price P0 and quantity Q0. As demand decreases, D0 shifts leftward to D1 and as supply decreases, S0 shifts leftward to S1, intersecting D1 at point B with lower quantity Q1. Since leftward shift in demand curve is more than the leftward shift in supply curve, price is lower at P1.

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