Chapter 7, Problem 3CYU

a)

To determine

The question requires us to draw a graph representing a fall in the equilibrium quantity, and determine the impact on the equilibrium price.

Explanation of Solution

A simultaneous increase in supply and a decrease in demand will cause the price level to fall, but the impact on quantity will be ambiguous. The quantity can increase, decrease, and remain the same based on the magnitude of change in supply and demand.

The following graph represents the situation where quantity falls due to the simultaneous change in demand and supply:

  

Here, an increase in supply shifts the supply curve to the right from S1 to S2, and a fall in demand shifts the demand curve to the left from D1 to D2. As a result, both the equilibrium price and the equilibrium quantity will fall.

The equilibrium quantity will fall because the change in demand is more than the change in supply as shown in the above figure.

Therefore, in the above situation, a simultaneous increase in supply and a fall in demand will:

• Decrease the price
• Decrease the quantity

Economics Concept Introduction

The following table represents the changes in equilibrium quantity and equilibrium price when demand and supply change:

Factors	Equilibrium quantity	Equilibrium price
Increase in demand	Increase	Increase
Decrease in demand	Decrease	Decrease
Increase in supply	Increase	Decrease
Decrease in supply	Decrease	Increase

b)

To determine

The question requires us to draw a graph representing an increase in the equilibrium quantity, and determine the impact on the equilibrium price.

Explanation of Solution

The following graph represents the situation where quantity increases due to the simultaneous change in demand and supply:

  

Here, an increase in supply shifts the supply curve to the right from S1 to S2, and a fall in demand shifts the demand curve to the left from D1 to D2. As the result, the equilibrium price will fall, and the equilibrium quantity will increase.

The equilibrium quantity increases because the change in demand is less than the change in supply as shown in the above figure.

Therefore, in the above situation, a simultaneous increase in supply and a fall in demand will:

• Decrease the price
• Increase the quantity