Answer to Question #111861 in Microeconomics for Kamogelo Mphalo

Question

Describe a scenario (real-life or fictitious) that reflects each of the following cases (Q.5.1-Q.5.3).
Thereafter, graphically illustrate and explain each scenario in each case clearly showing the impact
of the change on the equilibrium price and the equilibrium quantity of your chosen good.
(In cases where you simultaneously change demand and supply, assume that they change by the
same magnitude).
Note: Knowledge and understanding of the determinants of demand and supply are critical in
answering these questions.
Q.5.1 An increase in demand (while supply remains constant).
Q.5.2 An increase in demand and a simultaneous decrease in supply.
Q.5.3 A decrease in demand and a simultaneous increase in supply.

Answer 1

Q5.1 An increase in demand while the supply remains unchanged causes equilibrium price and quantity to increase. Due to increase in demand the quantity demanded will increase this will thereby increase competition in the market which will lead to increase in price of the product. hence, when the price increases demand decreases to reach to equilibrium and new equilibrium quantity and price will be derived.

Q5.2 By itself a supply decrease results in a decrease in equilibrium quantity and an increase in equilibrium price. A simultaneous increase in demand and decrease in supply unquestionably generates an increase in the price. However, the change in the quantity is in-determinant.

Q5.3 supply increase results in an increase in equilibrium quantity and a decrease in equilibrium price. A simultaneous decrease in demand and increase in supply unquestionably generates a decrease in the price.