Question

Suppose that both demand and supply decrease and the new equilibrium price is higher than the initial equilibrium price. Which curve shifted more?

a) Demand
b) Supply
c) Neither curve shifted
d) The two curves shifted equally

Answer 1

solution- The correct answer is part (b) that is supply

A fall in demand implies an excess supply which leads to a decrese in price, whereas a fall in supply means an excess demand which leads to a rise in price. The impact of fall in demand and fall in supply is opposite on price.

If both the supply and demand falls, the new equilibrium price will be higher if supply curve shifts more than the demand curve.

If the two curves shifted equally then there will be no change in equilibrium price.