Effect of simultaneous rightward shift in demand curve and leftward shift of supply on the equilibrium is?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: Price increases, quantity may increase, decrease, or remain constant.
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Rightward shift in the demand curve:
- This means that at any given price, consumers are willing to buy more of the product.
- This shift, by itself, would lead to both an increase in equilibrium price and an increase in equilibrium quantity.
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Leftward shift in the supply curve:
- This means that at any given price, producers are willing to supply less of the product.
- This shift, by itself, would lead to an increase in equilibrium price and a decrease in equilibrium quantity.
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Combined effect:
- Price: Both shifts push the price upwards. Therefore, the equilibrium price will definitely increase.
- Quantity: The demand shift increases quantity, while the supply shift decreases quantity. The net effect on quantity depends on the relative magnitudes of the shifts.
- If the demand shift is larger than the supply shift, quantity will increase.
- If the supply shift is larger than the demand shift, quantity will decrease.
- If the shifts are of equal magnitude, quantity will remain constant.