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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 summary, the effects of changes in demand and supply on equilibrium price and quantity are: 1. Increase in demand: Equilibrium price and quantity both increase. 2. Decrease in demand: Equilibrium price and quantity both decrease. 3. Increase in supply: Equilibrium price decreases, and equilibrium quantity increases. 4. Decrease in supply: Equilibrium price increases, and equilibrium quantity decreases.

Step by step solution

01

Define the concepts

In order to better understand the effects of changes in demand and supply, we need to define the following concepts: 1. Demand: The willingness and ability of consumers to purchase a product at different prices, holding everything else constant. 2. Supply: The willingness and ability of producers to provide a product at different prices, holding everything else constant. 3. Equilibrium price: The price at which the quantity of a product demanded by consumers is equal to the quantity supplied by producers. 4. Equilibrium quantity: The quantity of a product exchanged between consumers and producers at the equilibrium price.
02

Understand the relationship between demand, supply, equilibrium price, and equilibrium quantity

The relationship between demand, supply, equilibrium price, and equilibrium quantity can be represented by two curves on a graph: the demand curve and the supply curve. The demand curve shows the quantity of a product that consumers are willing to purchase at different prices, while the supply curve shows the quantity of a product that producers are willing to provide at different prices. The point where the demand curve and the supply curve intersect is the equilibrium point, which determines the equilibrium price and quantity.
03

Analyze the effect of an increase in demand

When there is an increase in demand, the demand curve shifts to the right. This leads to a new equilibrium point at a higher equilibrium price and a higher equilibrium quantity. This means that the price of the good and the quantity of goods exchanged in the market will both increase.
04

Analyze the effect of a decrease in demand

When demand decreases, the demand curve shifts to the left. This results in a new equilibrium point at a lower equilibrium price and a lower equilibrium quantity. Consequently, the price of the good and the quantity of goods exchanged in the market will both decrease.
05

Analyze the effect of an increase in supply

When there is an increase in supply, the supply curve shifts to the right. This leads to a new equilibrium point at a lower equilibrium price and a higher equilibrium quantity. In this case, the price of the good will decrease, while the quantity of goods exchanged in the market will increase.
06

Analyze the effect of a decrease in supply

When supply decreases, the supply curve shifts to the left. This results in a new equilibrium point at a higher equilibrium price and a lower equilibrium quantity. Therefore, the price of the good will increase, while the quantity of goods exchanged in the market will decrease. In conclusion, the effects of changes in demand and supply on equilibrium price and quantity can be summarized as follows: 1. Increase in demand: Equilibrium price and quantity both increase. 2. Decrease in demand: Equilibrium price and quantity both decrease. 3. Increase in supply: Equilibrium price decreases, and equilibrium quantity increases. 4. Decrease in supply: Equilibrium price increases, and equilibrium quantity decreases.

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