Question

Table:

	An Increase in Supply	A Decrease in Supply
An Increase in Demand	A	B
A Decrease in Demand	C	D

Refer to the Table above: Which combination would produce an increase in equilibrium price and an indeterminate change in equilibrium quantity?

Note: Start with a demand and supply curves and identify the initial equilibrium price and quantity. Then, change the demand and supply curves (indicated in the table) proportionally and identify the new equilibrium price and quantity. In some of the combinations, the price or quantity may not change, i.e., the effect is indeterminate (it depends on which change is the largest). For instance, the following diagram represents the combination 'D':

Results of combination D [decrease in demand and decrease in supply]: equilibrium quantity decreases, but the effect on equilibrium price is indeterminate. In this particular graph, price is staying the same. However, if the decrease in supply is larger than what is indicated in the graph, the new price (P'_e) will be greater than the initial price (P_e). On the other hand, if the decrease in demand is larger than the decrease in supply, the new equilibrium price will be lower than the initial equilibrium price.

A

B

C

D

Answer 1

Answer;

B (an increase in demand and a decrease in supply)

When demand increases and there is a decrease in supply, the result is that the price increases, but the quanitty will be indeterminate.

For example,

When demand increases, the demand curve shifts from D1 to D2. When supply decreases, supply curve shifts from S1 to S2. The result is increase in price from P1 to P2. But the quantity is indeterminate. In this graph,quantity is the same (Q1=Q2) because both demand and supply have changed equally (increase in demand = decrease in supply).

But if increase in demand > decrease in supply, then Q2 > Q1.

If decrease in demand < decrease in supply, Q2 < Q1.

Thus, quantity will be indeterminate.