Let us suppose that the market demand and market supply curve intersect each other at point E. Now the number of firms in the market increases. What will be the effect on equilibrium price and equilibrium quantity?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: Increase in quantity, decrease in price
- When the number of firms in the market increases, the market supply curve shifts to the right because more firms are producing and offering goods for sale.
- A rightward shift in the supply curve leads to:
- Increase in equilibrium quantity because more goods are available in the market.
- Decrease in equilibrium price because the increased supply puts downward pressure on prices.