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Student Question

A supply-demand graph can be described as having a demand curve that begins in the upper left and slopes downward to the lower right and having a supply curve that begins in the lower left and slopes upward to the upper right. Using words in a narrative, please describe and explain how both the equilibrium price and quantity will change when: a) Only supply decreases b) Only supply increases c) Only demand increases d) Only demand decreases.

Quick answer:

In supply-demand dynamics, when supply decreases alone, the equilibrium price increases while the equilibrium quantity decreases. When supply increases alone, the reverse occurs, with a decrease in price and an increase in quantity. When the demand increases or decreases, both equilibrium quantity and equilibrium price behave the same way. An increase in demand results in a higher price and quantity, but a decrease in demand leads to a lower price and quantity.

Expert Answers

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To understand changes in a supply-demand graph, you must first understand how the respective supply and demand curves behave. A supply curve suggests suppliers are willing to provide a lower quantity of a good or service when the price for that good or service is low. In contrast, they are willing to produce much more when the price to paid for the good or service is high. The demand curve works oppositely. Customers are willing to buy more at lower prices and less at higher prices. The equilibrium point for price and quantity is where the two curves intersect. At this point, suppliers will produce the precise quantity to meet the demand at the equilibrium price.

If supply decreases, the entire supply curve shifts to the left. With a reduced supply, fewer goods or services are supplied (equilibrium quantity decreases), and the equilibrium price for what is supplied increases. This is evident by the upward and leftward shift of the point of intersection. In contrast, if supply increases, the entire supply curve shifts to the right. Now suppliers produce at a higher equilibrium quantity. With more of the good or service available, the equilibrium price decreases.

If demand increases, the demand curve shifts to the right. With more people wanting to buy a good or service, suppliers can charge a higher price. At a higher price, suppliers are willing to produce more. Thus, both the equilibrium price and quantity increase. If demand decreases and the demand curve shifts to the left, the reverse occurs. When fewer people demand a food or service, the price decreases. At this lower price, suppliers produce less. The equilibrium price and quantity both decrease.

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