Question

Consider a market that is in equilibrium. If it experiences both a decrease in demand and a decrease in supply, what can be said of the new equilibrium? The equilibrium:

• quantity will definitely fall, while the equilibrium price cannot be predicted.

• price and quantity will both rise.

• price and quantity will both fall.

• price will definitely fall, while the equilibrium quantity cannot be predicted.

Answer 1

Answer : Option a) quantity will definitely fall, while the equilibrium price cannot be predicted

A decrease in demand will imply a leftwards (downwards) shift of the demand curve, while a decrease in supply implies a leftward (upwards) shift of the supply curve. Thus at the new equilibrium point, that is at the intersection point the equilibrium quantity will fall definitely, but the new equilibirum price cannot be predicted since that would depend on the respective price elasticities of both the demand and the supply curve.