in the simple economics of a competitive market price increase under which condition:
a)demand is constant.supply decline.
b)demand decreases.supply increases.
c)demand ans supply rise concomitantly.
Which do you think is the best answer?
I think the answer is b am I corerect?
Draw simple supply and demand curves. Then shift the curve(s) as suggested in each answer. What happens to price? (Hint: answer b is incorrect. A decrease in demand would lower price and an increase in supply would also lower price)
In a competitive market, the price can increase under different conditions. Let's consider each case:
a) If the demand is constant and the supply declines, the price is likely to increase. To understand why, let's break it down:
- When the demand is constant, it means that consumers are consistently demanding a certain amount of a particular product or service.
- On the other hand, if the supply declines, it means that the producers or sellers are reducing the quantity they are willing or able to offer in the market.
- With reduced supply and constant demand, there is a shortage of the product or service in question. This scarcity leads to increased competition among consumers, driving up the price.
b) If the demand decreases and the supply increases, the price is likely to decrease. Here's how that works:
- When the demand decreases, it means that consumers are not as interested in purchasing the product or service as they were before. This reduced demand typically indicates that consumers are willing to pay less.
- On the other hand, if the supply increases, it means that producers or sellers are offering more goods or services into the market. This increased supply creates a surplus, as producers are providing more than what the consumers currently demand.
- With decreased demand and increased supply, the market becomes more competitive among sellers, forcing them to lower prices in order to attract buyers.
c) When demand and supply rise concomitantly, the impact on prices can go either way depending on the relative magnitude of the changes:
- If the increase in demand is greater than the increase in supply, it is likely that the price will increase. This occurs because the market cannot meet the increased demand with supply, resulting in higher competition among buyers and thus driving prices up.
- Conversely, if the increase in supply is greater than the increase in demand, the prices are more likely to decrease. This is due to the surplus in supply, which offers various options for potential buyers and puts pressure on sellers to lower prices.
Understanding the relationship between demand, supply, and price is essential in analyzing how changes in these factors influence a competitive market. Economic principles like the law of supply and demand help explain these interactions and guide our understanding of market dynamics.