What will happen to the equilibrium price and quantity in the market for widgets if consumers and producers expect the price to rise in the future?
The correct answer and explanation is:
The equilibrium price and quantity in the market for widgets will change if consumers and producers expect the price to rise in the future. Specifically, both the price and quantity will increase in the short term.
Here’s how it works:
- Consumer Behavior: If consumers expect the price of widgets to rise in the future, they will want to purchase more now before the price increases. This increase in demand will shift the demand curve to the right. As demand increases, the price begins to rise. In response, consumers buy more widgets in anticipation of higher prices later.
- Producer Behavior: Producers, seeing the expected price increase, will likely want to sell more widgets at the higher future price. Therefore, they may reduce their current supply, preferring to hold off selling at the current price and instead sell at the higher price in the future. This reduction in supply shifts the supply curve to the left.
- Price and Quantity Adjustment: With demand increasing (shift right) and supply decreasing (shift left), there is upward pressure on the equilibrium price. The new equilibrium price will be higher than before, while the new equilibrium quantity could either rise or fall depending on the relative shifts in the demand and supply curves. However, in most cases, the decrease in supply will be smaller than the increase in demand, leading to a higher equilibrium quantity in the short term as consumers rush to buy widgets at the current price before it rises.
In conclusion, the expected rise in price in the future leads to higher demand and lower supply in the present, resulting in an increase in both the equilibrium price and quantity of widgets.