If some factor causes demand to decrease and another factor causes supply to decrease, what will be the net effect on price? (You may want to graph this.)A.Price drops to zeroB.Price is indeterminateC.Price increasesD.Price stays the sameE.Price decreases
Question
If some factor causes demand to decrease and another factor causes supply to decrease, what will be the net effect on price? (You may want to graph this.)A.Price drops to zeroB.Price is indeterminateC.Price increasesD.Price stays the sameE.Price decreases
Solution
The net effect on price when both demand and supply decrease can be indeterminate. This is because the decrease in demand tends to lower the price, while the decrease in supply tends to raise the price. The actual effect on price will depend on the relative magnitude of the shifts in supply and demand. If the decrease in demand is greater than the decrease in supply, the price will decrease. If the decrease in supply is greater than the decrease in demand, the price will increase. If the decreases in supply and demand are equal, the price will stay the same. Therefore, the correct answer is B. Price is indeterminate.
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