The latest data tell us that over the past 6 months, home prices in Madison have risen while the quantity sold has fallen. Which scenario would always predict this result?
A demand has decreased while supply has stayed the same
B demand has increased while supply has fallen
C demand has decreased and supply has decreased
D demand has increased while supply has remained the same
E demand has stayed the same while supply has decreased
The correct answer and explanation is:
The correct answer is E: demand has stayed the same while supply has decreased.
Here’s why:
In a typical market, the price of a good or service is determined by the interaction between demand and supply. When supply decreases and demand stays constant, the price tends to rise because there are fewer units available, but the same number of buyers are looking to purchase them.
In this case, the data shows that home prices in Madison have risen, but the quantity sold has fallen. This suggests that demand has remained stable, but the supply of homes available for sale has decreased. With fewer homes available, buyers are competing for the limited supply, which drives prices up. However, because there are fewer homes for sale, fewer transactions occur, leading to a fall in the quantity sold.
To break it down:
- Demand stays the same: There is no mention of a significant change in demand, so we assume it remains stable.
- Supply decreases: Fewer homes are available on the market, which limits the options for buyers.
- Price increases: As supply falls and demand remains steady, the price of homes rises.
- Quantity sold falls: Despite the higher prices, the reduced supply means fewer homes are sold.
This situation is a classic example of how a decrease in supply, with stable demand, leads to higher prices but lower quantities sold.