Question

From an initial equilibrium, suppose there’s an increase in demand. Once the market reaches its new equilibrium, there will be a. fewer transactions, and they will take place at a higher price. b. more transactions, and they will take place at a higher price. c. more transactions, and they will take place at a lower price. d. fewer transactions, and they will take place at a lower price.

Answer 1

Answer:

b. more transactions, and they will take place at a higher price.

Explanation:

The markets are at equilibrium where market demand = market supply. And; the downward sloping demand curve (inversely related to price), upward sloping supply curve (directly related to price) intersect.

From initial equilibrium, if there is increase in demand :  Increase in demand shifts demand curve rightwards. This creates excess demand at the previous equilibrium price. Excess demand leads competition among buyers, increases the equilibrium price. At new higher equilibrium price, quantity supplied expands & quantity demanded (at the new increased demand curve) contracts. The new equilibrium quantity is then determined at a higher equilibrium quantity.

The new higher equilibrium price & quantity are determined at the intersection of new increased (rightwards shifted) demand curve with the supply curve {as per the above explained mechanism}