If demand and supply both increase, which of the following will definitely occur?
A. The equilibrium price will decrease.
B. The equilibrium quantity will increase.
C. The equilibrium quantity will decrease.
D. The equilibrium price will increase.
The correct answer and explanation is:
The correct answer is B. The equilibrium quantity will increase.
When both demand and supply increase, the effect on the equilibrium price is uncertain, but the equilibrium quantity will definitely increase.
Here’s why:
- Increase in Demand: When demand increases, consumers are willing to buy more of the good at each price level. This causes the demand curve to shift to the right, which tends to increase both the equilibrium price and quantity.
- Increase in Supply: When supply increases, producers are willing to produce and sell more of the good at each price level. This shifts the supply curve to the right, which tends to decrease the equilibrium price while increasing the equilibrium quantity.
When both curves shift to the right, the equilibrium quantity will increase because both more consumers are demanding the good and more producers are supplying it. The increase in quantity comes from both the increased demand and the increased supply.
However, the equilibrium price may either increase, decrease, or remain unchanged, depending on the relative magnitudes of the shifts in supply and demand. If the demand increase is larger than the supply increase, the price will rise. If the supply increase is larger, the price will fall. If they are equal, the price may stay the same.
Thus, while the equilibrium quantity definitely increases, the equilibrium price is indeterminate without more specific information about the shifts in demand and supply.