Suppose that the market for athletic shoes is initially in equilibrium at point A. Further suppose the demand for athletic shoes
increases rapidly during 2020. At the same time, six more firms begin producing athletic shoes. A student remarks that, because of these events, we can't know for certain whether the price of athletic shoes will rise or fall. The student's remarks (that, because of these events, we can't know for certain whether the price of athletic shoes will rise or fall) is
1 answer:
Answer: Correct. When there is an increase in supply and an increase in demand, the new equilibrium quantity increases but whether the equilibrium price increases or decreases is unknown.
Explanation:
When the demand for the shoes increased, it had the effect of shifting the demand curve to the right. At the same time, with six more firms coming into the market, the supply increased as well which had the effect of shifting the supply curve right as well.
The new equilibrium as a result of these movements will see the quantity increase. However, due to the shift of both the supply and the demand curve in the same direction, it is uncertain if the price will change or not.
The general rule is that if the rise in supply is more than rise in demand then the price will decrease. If they rise by the same amount then price will remain the same. It shows therefore that if both supply and demand rise at the same time, the effect on equilibrium price is unknown.
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