What happens in the market with an upward sloping supply curve when there is a shift in the demand curve due to an external shock?
Part 2
A.
Production decisions will be unaffected.
B.
Price will not change.
C.
A new equilibrium price will be achieved over some period of time.
D.
Price will immediately adjust to a new equilibrium.
C.
A new equilibrium price will be achieved over some period of time.
When there is a shift in the demand curve due to an external shock in a market with an upward sloping supply curve, the outcome depends on the specific circumstances.
Part 1: In general, when there is a shift in the demand curve, it will affect the equilibrium price and quantity in the market.
Part 2: The correct answer is C. A new equilibrium price will be achieved over some period of time.
Explanation: An external shock that shifts the demand curve will cause a mismatch between the quantity demanded and the quantity supplied at the initial price. This creates a temporary imbalance in the market. In response to this imbalance, prices will adjust to restore equilibrium. However, it may take some time for the market to reach a new equilibrium price, as it depends on how quickly producers can adjust their production levels and how responsive consumers are to the price changes. Therefore, the price will not immediately adjust to a new equilibrium (option D), and production decisions may be affected (option A). Additionally, since there is a shift in the demand curve, the equilibrium price will change (option B is incorrect).
To understand what happens in the market with an upward-sloping supply curve when there is a shift in the demand curve due to an external shock, we need to consider the interaction between supply and demand.
When the demand curve shifts due to an external shock, such as a change in consumer preferences or income, several outcomes are possible. Let's go through the options:
A. Production decisions will be unaffected: Under this scenario, the shift in the demand curve does not impact the production decisions of suppliers. This could occur if suppliers are unwilling or unable to adjust their production levels in response to the change in demand.
B. Price will not change: If the supply curve is perfectly elastic, meaning a small change in demand causes a large change in quantity supplied without affecting the price, then the price may not change despite the shift in demand. However, an upward-sloping supply curve indicates that suppliers are willing to supply more at higher prices, so there is a possibility of price change.
C. A new equilibrium price will be achieved over some period of time: In most cases, a shift in the demand curve will lead to a new equilibrium price and quantity. When the demand increases, the quantity demanded will exceed the quantity supplied at the previous equilibrium price. This imbalance will exert upward pressure on the price, prompting suppliers to increase their production. As supply increases, the market will move towards a new equilibrium where the quantity demanded equals the quantity supplied at a higher price.
D. Price will immediately adjust to a new equilibrium: This scenario assumes that the market quickly adjusts to the new equilibrium price and quantity without any delay or lag. It suggests that suppliers can rapidly increase or decrease their production in response to changes in demand and there are no frictions or delays in the market.
In conclusion, the most likely outcome when the demand curve shifts due to an external shock in a market with an upward-sloping supply curve is that a new equilibrium price will be achieved over some period of time (Option C). However, the ultimate outcome depends on various factors such as the elasticity of supply, the speed at which suppliers can adjust production, and the presence of market frictions.