Question

What will happen to the equilibrium quantity and price of a product in a competitive market when the increase in demand exactly offsets the decrease in supply?

Answer 1

The correct answer is letter "D": Equilibrium quantity will stay the same and equilibrium price will increase.

Step-by-step explanation:

Given a market for a certain good or service, if the demand covers exactly a decrease in supply, then the equilibrium quantity will not change. The same will not happen with the equilibrium price. Because of the decrease in the supply, the equilibrium price is likely to rise.

Answer 2

Equilibrium quantity will stay the same and equilibrium price will increase.

Step-by-step explanation:

When the increase in demand results in an exact reduction in supply by the same value, there is a shift in demand to the right (increase) and a shift in supply to the left (reduce).

This will result in the same equillibrum quantity but there will be an increase in equilibrium price.

This is illustrated in the attached diagram.

Demand shifts from D1 to D2 and supply shifts from S1 to S2.

Quantity remains the same at 300 while equillibrum price rises from 3 to 5.