Which of the following statement/statements are true?
Statement 1: When decrease in demand is less than decrease in supply, leftward shift in supply curve will be more than leftward shift in demand.
Statement 2: When decrease in demand is less than decrease in supply, price increases and quantity remains constant.
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Statement 1 is true and Statement 2 is false.
Statement 1: True
- When the decrease in demand is less than the decrease in supply, the leftward shift of the supply curve is greater than the leftward shift of the demand curve.
- Since supply is falling more than demand, there will be a shortage of goods, leading to an increase in equilibrium price and a decrease in equilibrium quantity.
- Therefore, this statement is correct.
Statement 2: False
- When supply decreases more than demand, the price increases, but quantity does not remain constant.
- The reduction in supply causes the total quantity in the market to decrease because fewer goods are available.
- The incorrect part of this statement is "quantity remains constant."