Question

The equilibrium price will fall and the equilibrium quantity might increase, decrease, or stay the same when the:

demand and the supply of a good both decrease.

demand for a good decreases and the supply of it increases.

demand and the supply of a good both increase.

demand for a good increases and the supply of it decreases.

Answer 1

Solution:-

The equilibrium price will fall and equilibrium quantity might increase , decrease or stay the same when demand for a good decreases and supply of it increases.

The effect of simultaneous decrease in demand and increase in supply on equilibrium price and quantity can be analysed under following three cases:

1. When decrease in demand is equal to increase in supply then equilibrium price will fall and quantity remaines the same.

2. When decrease in demand is less than increase in supply then equilibrium price will fall and equilibrium quantity will rise.

3. When decrease in demand is greater than increase in supply then equilibrium price will fall and equilibrium quantity will decrease.

Therefore Option (2) is correct.