Given the following scenario, what happens to the equilibrium price and quantity for new homes?
- New homes. The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases. indicate what happens to demand, supply, equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand and supply that causes the shifts.
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In this case, the equilibrium price for houses will fall and the equilibrium quantity may or may not fall.
The equilibrium price will fall because demand will fall and supply will rise. Demand will fall because of a decline in consumer income. Supply will rise because of a drop in the price of inputs. Increases in supply and decreases in demand both cause drops in equilibrium price.
We cannot know for sure if the equilibrium quantity will rise or fall. A drop in demand would, all other things being equal, lead to a drop in quantity. However, an increase in supply would lead to an increase in quantity. Thus, the two factors are working against each other. We cannot know from the information given with factor will have a greater effect.
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