Answer: The correct answer is option B; The student’s analyses is correct.
Explanation: A shift to the right of the supply curve indicates an increase in the aggregate supply or total market supply (which is due to certain factors). Producers only do this provided there would be an increase in market price. However, the equilibrium price would fall from P1 to P2. This follows the law of demand, that is, the higher the price the lower the quantity demanded.”
The fall in price would result in a new equilibrium price, P2. At this lower price level, consumers aggregate demand would also experience an increase, shown by a shift to the right in the demand curve. A new equilibrium price P3, would again be reached which would be convenient for both consumers and producers.
It is important to note that rational consumer behavior is such that a slight increase in price would discourage buying and vice versa. On the other hand, a rational producer is out to make profit and so a slight increase in price would encourage them to supply more and vice versa. Hence if the producers supply curve shifts to the right (an increase), it only means there is a price increase and if the consumers respond by reducing quantity demanded, then there has to be a new meeting point (new equilibrium price).
That explains the fall from equilibrium price P1 to equilibrium price P3.
