Question

In the market for pencils, the cost of producing graphite (used for pencil lead) falls at the same time the number of students taking standardized exams that must be filled out in pencil decreases (because more is done on-line). What will happen to equilibrium price and quantity?

Answer 1

Answer: the fall in cost of producing graphite will decrease the cost of production of the pencils so producer will increase the supply of pencils in the market which will shift the supply curve rightward but at the same time demand for pencils by students also falls due to on-line pattern of exams so it will shift the demand curve left so both these shift in demand and supply curve will lead to decrease in price while the equilibrium quantity will not change. As shown in the below graph:

X- axis shows quantity and Y- axis shows price of pencils.

S1S1 is supply curve and DD is demand curve of market and e1 is the equilibrium point

now supply increases and supply curve shift to s2 , demand decreases and demand curve shift to leftward to D2D2

the equilibrium is at the e2 point where new demand and supply curve intersect each it shows that the equilibrium price decreases to p2 from p while quantity remains unchanged