Assume the market for ceiling fans is perfectly competitive and is currently in equilibrium

Economics Dec 18, 2020

Assume the market for ceiling fans is perfectly competitive and is currently in equilibrium. If the demand increases while the supply decreases, then we can be certain that:

A. the equilibrium price will increase.

B. the equilibrium quantity will increase.

C. both price and quantity will increase.

D. both price and quantity will decrease.

Expert Solution

A. the equilibrium price will increase.

Since it is a perfectly competitive market, we will assume that increase in demand for ceiling fans is proportionately equal to decrease in the supply of ceiling fans. On the graph below, a rightward shift in demand curve from D0 t0 D1 is proportionately identical to leftward change in supply curve from S0 to S1. It is clear that as equilibrium price increases from Pe to P0, the equilibrium quantity remains unmarred at Qe.

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