Correct Option: B. The equilibrium price increases
Detailed Explanation:
- Understanding Equilibrium Price:
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The equilibrium price is the price at which the quantity of a good demanded by consumers equals the quantity supplied by producers. This is where the demand and supply curves intersect on a graph.
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Impact of Increased Demand:
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When demand for a good increases, it means that consumers are willing to buy more of that good at every price level. This can happen due to various factors such as an increase in consumer income, changes in consumer preferences, or an increase in the price of substitute goods.
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Graphical Representation:
- Imagine a graph where the vertical axis represents price and the horizontal axis represents quantity. The demand curve slopes downwards (from left to right), indicating that as price decreases, quantity demanded increases. The supply curve slopes upwards, indicating that as price increases, quantity supplied increases.
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When demand increases, the demand curve shifts to the right. This shift means that at every price level, consumers want to buy more of the good than before.
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Finding the New Equilibrium:
- With the demand curve shifting to the right, the new intersection point with the supply curve will be at a higher price level. This is because the quantity supplied remains constant (as per the question), but the quantity demanded at the original equilibrium price is now greater than what is supplied.
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To restore equilibrium, the price must rise until the quantity demanded equals the quantity supplied again. Thus, the equilibrium price increases.
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Conclusion:
- Therefore, when demand increases while supply remains constant, the equilibrium price must increase to balance the higher quantity demanded with the unchanged quantity supplied.
Why Other Options Are Incorrect:
- Option A: The equilibrium price decreases:
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This option is incorrect because a decrease in equilibrium price would imply that demand has fallen or supply has increased, which contradicts the premise of an increase in demand.
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Option C: The equilibrium price remains unchanged:
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This option is also incorrect. If demand increases while supply remains constant, the equilibrium price cannot remain unchanged. The increased demand creates upward pressure on prices.
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Option D: The equilibrium price fluctuates randomly:
- This option is misleading. While prices can fluctuate due to various market dynamics, a direct increase in demand with constant supply leads to a predictable increase in equilibrium price, not random fluctuations.
Common Pitfalls:
- Confusing Demand and Supply Shifts: Students often confuse shifts in demand with shifts in supply. Remember, an increase in demand shifts the demand curve to the right, while an increase in supply shifts the supply curve to the right.
- Ignoring the Constant Supply: It’s crucial to note that the supply remains constant in this scenario. If supply were to change, the analysis would differ significantly.
Revision Summary:
- An increase in demand leads to a rightward shift of the demand curve.
- The equilibrium price increases when demand rises and supply remains constant.
- The new equilibrium is found at a higher price where the new demand curve intersects the unchanged supply curve.
- Always differentiate between shifts in demand and shifts in supply to avoid confusion.