Question

Please show detail and work

12. Consider a typical supply and demand framework in which Demand and Supply have their usual slopes $Price (P) Quantity (Q) Suppose the market is initially in equilibrium at Pe, Qe on the graph above. If there were a decrease in demand, what would be the situation in the market if the price did not change? a. Surplus. b. Shortage. c. A tendency for the price to increase from its original level d. The market would be in equilibrium. e. None of the above

Answer 1

If the market price did not change there should be a surplus in the market, when the demand decreases the demand curve shifts to the left and there will be a decrease in prices as well as a decrease in quantity. So if the price did not change the producers will be producing the same quantity as previous so this leads a surplus of the commodity and this is shown by the below graph.

Surplus Price pl D1 ql quantity

Here the price need to be reduced for clearing the excess supply in the market, the excess supply is shown by the green line in the graph.

Ans: Surplus.