Question

Suppose the number of buyers in a market decreases and a technological advancement occurs also. what would we expect to happen in the market?

a. equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b. equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
c. equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d. none of the above is correct.

Answer 1

The correct answer is (a), where the equilibrium price would decrease due to the combined effects of a decrease in demand and an increase in supply, but the effect on equilibrium quantity is ambiguous.

Step-by-step explanation:

The scenario provided by the student describes two simultaneous changes in the market: a decrease in the number of buyers, which constitutes a decrease in demand, and a technological advancement, which typically leads to an increase in supply. According to economic principles, a decrease in demand would lead to a lower equilibrium price and quantity. On the other hand, an increase in supply, often due to technological advancements, generally results in a lower equilibrium price but a higher quantity.

When combining these two effects, we can expect that the equilibrium price would decrease because both a decrease in demand and an increase in supply exert downward pressure on the price. However, the impact on the equilibrium quantity is ambiguous, since the decrease in demand suggests a lower quantity but the increase in supply suggests a higher quantity. Therefore, the correct answer is: (a) equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

Answer 2

This is very situational really. It depends on the magnitude of the shift of the two curves, for example, both the quantity and price may change, or one of them will be the same and the other will change. But the answer is A, and there is a long explanation provided below.

Further (and rather advanced) explanation:

If you look at the diagrams that I made, you can see that on the left, if the shift of the supply curve is greater than the shift in the demand curve, then output will increase whereas price will decrease. However, if the shift in the demand curve is greater than the shift in the supply curve, then both the price and output will decrease. Therefore, the decrease in price will happen, but output is rather ambiguous, giving us A.