Chapter 4: Problem 20

Whether the product market or the labor market, what happens to the equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply, and decrease in supply.

Short Answer

Expert verified

In the product and labor market, the equilibrium price and quantity change based on shifts in demand and supply. When demand increases, there's a higher equilibrium price and quantity, leading to higher wages and employment. Conversely, a decrease in demand results in lower prices and quantities, reducing wages and employment levels. An increase in supply leads to a lower price and higher quantity, resulting in lower wages but increased employment. Lastly, a decrease in supply corresponds to a higher equilibrium price and lower quantity, increasing wages and reducing employment levels.

Step by step solution

Understanding Demand and Supply Curves

In order to understand the impact of these changes, one must first have a basic understanding of how supply and demand curves function. A demand curve shows the quantity of a good that buyers are willing and able to buy at different prices within a certain time period, while a supply curve shows the quantity of a good that producers are willing and able to sell at different prices within a certain time period.

Increase in Demand

When there is an increase in demand, the demand curve shifts to the right, indicating that at every price, buyers desire to purchase more of the good. This increased demand, without a change in supply, leads to higher equilibrium price and higher equilibrium quantity. In the labor market, this analogy translates to higher wages and a higher quantity of employment.

Decrease in Demand

When there is a decrease in demand, the demand curve shifts to the left, indicating that at every price, buyers desire to purchase less of the good. This decreased demand, without a change in supply, leads to a lower equilibrium price and a lower equilibrium quantity. In the labor market, this translates to lower wages and lower quantity of employment.

Increase in Supply

When there is an increase in supply, the supply curve shifts to the right, indicating that producers are willing to sell more of the good at every price. This increase in supply, without a change in demand, leads to a lower equilibrium price and a higher equilibrium quantity. In the labor market, this translates to lower wages but a higher quantity of employment.

Decrease in Supply

When there is a decrease in supply, the supply curve shifts to the left, indicating that producers are willing to sell less of the good at every price. This decrease in supply, without a change in demand, leads to a higher equilibrium price and a lower equilibrium quantity. In the labor market, this translates to higher wages and lower quantity of employment. Remember, these are general guidelines. Other factors could contribute to changes in the price and quantity that may not follow this model.