Which of the following statement/statements are true?
Statement 1: When increase in demand is less than increase in supply, equilibrium price falls.
Statement 2: When increase in demand is less than increase in supply, equilibrium quantity increases.
Answer & explanation
Correct answer: option 1
The correct answer is option 1: Both Statements are true
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Statement 1: "When increase in demand is less than increase in supply, equilibrium price falls."
- This is true because when supply increases more than demand, the excess supply creates downward pressure on price, leading to a fall in the equilibrium price.
- The increased supply means sellers must lower prices to clear their stock.
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Statement 2: "When increase in demand is less than increase in supply, equilibrium quantity increases."
- This is true because both an increase in demand and an increase in supply lead to higher equilibrium quantity.
- Even if demand increases by a smaller amount than supply, the overall effect still results in a rise in quantity exchanged in the market.