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An increase in demand causes an increase in the equilibrium price

Economics Dec 13, 2020

An increase in demand causes an increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply. True or false.

Expert Solution

This is a false statement. Both supply curve shifts only when there is a change in non-price determinants of supply. You move along the supply curve when there is a change in the price of the good. The reason is simple. Price is on the vertical axis. Thus, a change in price represents movement along the supply curve. Conversely, non-price determinants such as input prices, technology, are not measured in any of the axis. Hence, you shift the supply curve when one of non-price determinants of supply changes. When supply curve shifts, there is a change in supply, whereas when you move along the curve, there is a change in quantity supplied. Thus, the increase in equilibrium price will then cause an increase in quantity supplied, not in supply.

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