Question

If demand decreases and supply increases, the direction of change in the equilibrium quantity is un-predictable unless the relative magnitudes of the demand and supply changes are known.

A) True
B) False

Answer 1

The correct answer is option A.

Step-by-step explanation:

A decrease in the demand for a product will cause the demand curve to shift to the left. At the same time, an increase in the supply of the product will cause the supply curve to shift to the right.

In such a situation the change in the equilibrium quantity cannot be predicted. It depends on the magnitude of change in demand and supply.

If the proportionate decrease in demand is more than the increase in the supply of the product, the equilibrium quantity will decrease.

If the increase in supply is more than the decrease in demand, the equilibrium quantity will increase.

If the proportionate increase in supply is equal to a proportionate decrease in demand, the equilibrium quantity will remain the same.