If demand increases and supply remains constant, what happens to the market equilibrium? Quantity and price both fall. Quantity rises and price falls. Quantity and price both rise.
The Correct Answer and Explanation is:
Correct Answer: Quantity and price both rise.
Explanation:
In economics, the market equilibrium is the point where the quantity of a good that buyers are willing and able to purchase is exactly equal to the quantity that sellers are willing and able to sell. This intersection of the supply and demand curves determines the equilibrium price and equilibrium quantity.
When demand increases while supply remains constant, the entire demand curve shifts to the right. This shift signifies that at any given price, consumers now want to buy a larger quantity of the good or service. This could be due to various factors such as an increase in consumer income, a change in preferences favoring the product, a rise in the price of a substitute good, or an increase in the number of buyers in the market.
With the demand curve now further to the right and the supply curve unchanged, the original equilibrium point is no longer valid. At the initial equilibrium price, the new, higher quantity demanded now exceeds the constant quantity supplied, creating a situation of shortage.
This shortage puts upward pressure on the price. As buyers compete for the limited available goods, they are willing to offer higher prices. In response to the rising price, sellers find it more profitable to produce and sell more of the good, causing a movement upward along the stationary supply curve. This increase in price also causes a movement upward along the new demand curve, as some consumers reduce the quantity they wish to buy at the higher price.
The market will continue to adjust until it reaches a new equilibrium point. This new equilibrium is found where the new demand curve intersects the original supply curve. At this new intersection, both the equilibrium price and the equilibrium quantity are higher than they were before the shift in demand. Therefore, an increase in demand with a constant supply leads to a rise in both the market price and the quantity sold.
