Correct Option: C. Equilibrium price increases, equilibrium quantity increases
Step-by-Step Explanation:
- Understanding Demand and Supply:
- In economics, the demand for a product refers to how much of that product consumers are willing and able to purchase at various prices.
- Supply refers to how much of the product producers are willing and able to sell at various prices.
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The equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers. The equilibrium quantity is the amount of the product sold at this price.
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Impact of Increased Demand:
- When demand for a product increases, it means that at every price level, consumers are now willing to buy more of the product than before. This can be due to various factors such as increased consumer income, changes in consumer preferences, or a rise in the price of substitute goods.
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Since the supply remains constant (i.e., producers are not changing the amount they are willing to sell), the increased demand creates a situation where more consumers want to buy the product than what is available.
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Shifting the Demand Curve:
- In graphical terms, the demand curve shifts to the right. This shift indicates that at every price point, the quantity demanded has increased.
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The new intersection point of the demand curve with the unchanged supply curve will occur at a higher price and a higher quantity.
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Resulting Changes:
- Equilibrium Price: As demand increases and supply remains constant, the competition among consumers to purchase the limited quantity available drives the price up. Therefore, the equilibrium price increases.
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Equilibrium Quantity: The higher price incentivizes producers to supply more of the product, leading to an increase in the equilibrium quantity sold in the market.
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Conclusion:
- Thus, when demand increases while supply remains constant, both the equilibrium price and equilibrium quantity rise. This is why the correct answer is C: Equilibrium price increases, equilibrium quantity increases.
Why Other Options Are Incorrect:
- Option A: Equilibrium price increases, equilibrium quantity decreases:
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This option suggests that while the price goes up, the quantity sold goes down. This is contradictory to the basic principles of demand and supply. An increase in demand should not lead to a decrease in quantity sold.
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Option B: Equilibrium price decreases, equilibrium quantity increases:
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This option implies that as demand increases, the price falls, which is also incorrect. Higher demand typically leads to higher prices, not lower.
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Option D: Equilibrium price remains unchanged, equilibrium quantity decreases:
- This option suggests that despite an increase in demand, the price does not change, and the quantity sold decreases. This is not possible because an increase in demand with constant supply will always lead to a higher price and quantity.
Common Pitfalls:
- Students often confuse the effects of demand and supply changes. Remember that an increase in demand leads to higher prices and quantities, while an increase in supply (with constant demand) would lead to lower prices and higher quantities.
- It’s essential to visualize the demand and supply curves to understand how shifts affect equilibrium.
Revision Summary:
- An increase in demand with constant supply leads to higher equilibrium prices and quantities.
- The demand curve shifts right, indicating increased consumer willingness to buy.
- Higher competition among consumers drives prices up, while producers respond by increasing supply.
- Always remember the basic principles of demand and supply when analyzing market changes.