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Chapter 6: Problem 6

If supply decreases by more than demand decreases, what happens to equilibrium price?

Short Answer

Expert verified
If supply decreases more than demand decreases, the equilibrium price will increase.

Step by step solution

01

Understanding Demand and Supply

The demand-supply model indicates that the price of any good adjusts to bring the quantity demanded and quantity supplied into balance. As an effect, we achieve an equilibrium price where demand equals supply.
02

Change in Demand and Supply

In the given scenario, both demand and supply have decreased. It means consumers want to buy less of the good, and producers want to sell less. But the decrease in supply is more than the decrease in demand. Hence, the overall situation is one of reduced supply being available for diminished but relatively steadier demand.
03

Understanding the effect on Equilibrium Price

When supply decreases more than demand, it creates a shortage in the market. To combat this shortage, the price of the product tends to increase. This is to balance the decreased supply with the still present demand. Therefore, the decrease in supply results in an increase in the equilibrium price. This becomes our new equilibrium point.

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Most popular questions from this chapter

If supply decreases and demand is constant, what happens to equilibrium price?

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