Answer to Question #223574 in Microeconomics for Raksha

Question

 if the demand for steel increases and, at the same time, improvements in technology lower steel production costs, what would happen to the new equilibrium price and quantity?

Price increase, quantity increase

Price increase, indeterminate quantity change

Price decrease, quantity increase

Indeterminate price change, quantity increase

Indeterminate price change, indeterminate quantity change

Answer 1

• The answer to this question is Indeterminate price change, quantity increase.

On the graph below, the increase in demand for steel is shown by the rightward change in the demand curve from D1 to D2. Further, the increase in the supply of steel due to lower production costs is shown by the rightward shift in the supply curve from S1 to S2. An increase in demand increases both equilibrium price and quantity. On the other hand, an increase in supply reduces the equilibrium price while increases the equilibrium quantity. From this, we are sure that the equilibrium quantity will increase. However, we are not sure of the change in price since the increase in demand increases price while the increase in supply reduces the price. We can only tell the direction of change in price if we have information concerning the magnitude of shifts in demand and supply. For example, if the increase in demand is the same as the increase in supply, then the equilibrium price will remain unchanged, as shown in the graph below. If the increase in demand surpasses the increase in supply, then the equilibrium price will increase. On the contrary, if the increase in supply exceeds the increase in demand, then the equilibrium price will decline.