What happens to the market equilibrium if supply decreases and demand increases? The equilibrium price will increase and the quantity will decrease The equilibrium price will decrease and the quantity will increase The equilibrium price and quantity will both increase The equilibrium price and quantity will both decrease
Question
What happens to the market equilibrium if supply decreases and demand increases? The equilibrium price will increase and the quantity will decrease The equilibrium price will decrease and the quantity will increase The equilibrium price and quantity will both increase The equilibrium price and quantity will both decrease
Solution
When supply decreases and demand increases, the equilibrium price will increase. This is because the decrease in supply creates a shortage, driving up the price. At the same time, the increase in demand means more consumers are willing to pay a higher price, further pushing up the price.
However, the effect on the equilibrium quantity is ambiguous and depends on the relative magnitude of the shifts in supply and demand. If the increase in demand is larger than the decrease in supply, the equilibrium quantity will increase. If the decrease in supply is larger than the increase in demand, the equilibrium quantity will decrease.
So, without knowing the relative magnitudes of the shifts, we can't definitively say what will happen to the equilibrium quantity. But we can say with certainty that the equilibrium price will increase.
Similar Questions
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How is market equilibrium affected when there is an increase in demand, holding everything else constant? Price and quantity both increase Price increases and quantity decreases Price decreases and quantity increases Price and quantity both decrease
What happens when there is a decrease in supply, but demand remains constant?Market equilibrium price fallsMarket equilibrium price risesMarket equilibrium quantity risesMarket equilibrium quantity falls
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