Question

Explain the effect of a simultaneous decrease in both demand and supply on equilibrium price and quantity.

Answer 1

When both demand and supply of a commodity decrease (i.e., when demand and supply curves of a commodity shift to the left), the equilibrium quantity will fall but the equilibrium price may or may not be affected. There may be three situations:
(i) When a decrease in demand is more than the decrease in supply, the equilibrium price will fall. See Fig. (a).
(ii) When the decrease in demand is less than the decrease in supply, the equilibrium price will go up. See Fig. (b).
(iii) When the decrease in demand is equal to a decrease in supply, there will be no change in the equilibrium price.
See Fig. (c).