Question

Given the situation of a simultaneous decrease in demand and increase in supply, what is the net effect on equilibrium price?

a) Equilibrium price will always go up
b) Equilibrium price will always go down
c) Equilibrium price could go up or down

Answer 1

b) Equilibrium price will always go down

Step-by-step explanation:

Remember, the equilibrium price refers to the price where the quantity demanded is equal to the quantity supplied.

Thus, given the situation of a simultaneous decrease in demand and increase in supply note that;

1. A decrease in demand will result in a reduction in the equilibrium price (let's say of apples) because with less demand there will be an excess in supply.

2. An increase in supply will cause a reduction in the equilibrium price of apples because there will be an excess supply of apples at the initial price.