Assuming the good is normal, which of the following combinations of events could cause the price of the good to increase and the quantity to decrease?
The correct answer and explanation is:
The correct answer is a decrease in supply combined with an increase in demand.
Explanation:
When considering how the price and quantity of a good change, we must look at both supply and demand factors. Here, the good is normal, meaning that as income rises, the demand for the good also increases.
- Decrease in Supply: A decrease in supply occurs when the availability of the good is reduced. This could happen for various reasons, such as an increase in production costs, shortages of necessary resources, or regulatory changes that restrict production. When supply decreases, there are fewer goods available in the market, leading to upward pressure on the price because the same quantity is now being demanded.
- Increase in Demand: An increase in demand occurs when consumers are willing to buy more of the good at every price level. This could be driven by factors such as an increase in income, a change in consumer preferences, or external factors (such as a rise in the price of a substitute good). When demand increases, there is greater competition among buyers, which also drives up the price.
Impact on Price and Quantity:
- Price Increase: Both a decrease in supply and an increase in demand push the price of the good upward. With a decrease in supply, the price rises because there is less of the good available. An increase in demand also causes prices to rise as more people are competing for the same quantity of goods.
- Quantity Decrease: The decrease in supply directly reduces the number of goods available in the market, which causes the equilibrium quantity to fall. The increase in demand usually increases the quantity, but if the supply reduction is large enough, the overall quantity in the market could still decrease because fewer goods are being supplied.
Therefore, a combination of these two factors—decreased supply and increased demand—can lead to a scenario where the price of the good increases and the quantity decreases.