The correct answer is Option 4: Decrease in demand < increase in supply
- Equilibrium quantity increases when overall market supply increases more than the reduction in demand.
- Equilibrium price falls when supply increases more than demand, leading to an excess supply situation that forces prices down.
- This occurs when the increase in supply is greater than the decrease in demand, shifting the supply curve rightward more than the leftward shift of the demand curve.
Why Other Options Are Incorrect?
- Decrease in demand < decrease in supply → Incorrect
- If supply decreases, equilibrium quantity would fall, not rise.
- Increase in demand > increase in supply → Incorrect
- If demand increases more than supply, price would increase, not decrease.
- Decrease in demand > increase in supply → Incorrect
- If demand falls more than supply increases, both equilibrium price and equilibrium quantity would decrease.
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