Suppose there is a decrease in both the demand for and supply of a good.What happens to equilibrium price and quantity?
A) Equilibrium quantity increases, but the effect on equilibrium price is ambiguous.
B) Equilibrium quantity decreases, but the effect on equilibrium price is ambiguous.
C) Equilibrium price increases, but the effect on equilibrium quantity is ambiguous.
D) Equilibrium price decreases, but the effect on equilibrium quantity is ambiguous.

Question

Quizplus · Accepted Answer

When there is a decrease in both demand and supply, the equilibrium quantity will decrease, as both factors are pushing the quantity demanded and supplied down. However, the effect on the equilibrium price is ambiguous, as the concurrent decrease in both demand and supply is likely to cause a shift in the equilibrium price in opposite directions. The net effect will depend on the magnitudes of the shifts and their relative strengths. Therefore, it is impossible to determine the direction of change in the equilibrium price without further information.

Suppose There Is a Decrease in Both the Demand for and Supply