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The demand for a good decreases by 10% and the supply of the good decreases by 8%
The demand for a good decreases by 10% and the supply of the good decreases by 8%. The price of the good .......because ........
A. Falls; when the demand decreases or the supply decreases price falls.
B. Falls; demand creases by more than supply and when the demand decreases prices falls.
C. Rises; when the demand decreases or the supply decreases the price rises.
D. Rises; demand decreases by more than the supply and when the demand decreases prices falls.
E. Either rises or falls; demand decreases and supply decreases.
Expert Solution
B. The price of the good falls, because demand decreases by more than supply and when the demand decreases prices fall.
When the demand drops more than the supply, there will be excess supply in the market. Therefore, the producers will be forced to lower their prices to attract the customers to buy their products. On the graph featured here, you can see that a decrease in demand is demonstrated by the shift in the demand curve from D1 to D0. This change causes the quantity bought to reduce from Q1 to Q0. Consequently, the price declines from P1 to P0.
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