Question

Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity have both increased. Based on this information we can conclude that:_______.
a) the supply of clothing has grown faster than the demand for clothing.
b) demand for clothing has grown faster than the supply of clothing.
c) the supply of and demand for clothing have grown by the same proportion.
d) there is no way to determine what has happened to supply and demand with this information.

Answer 1

Answer:

b) demand for clothing has grown faster than the supply of clothing.

Explanation:

Markets are at equilibrium where demand = supply & upward sloping supply curve, downward sloping demand curve intersect.

Fall in production costs will increase the supply (because of higher profit margins). This is likely to create excess supply & competition among sellers will reduce price, new equilibrium established at lower price, more quantity.

However, increase in price along with more quantity is due to demand. This can happen when increased supply is overpowered by more increased demand. If increase in demand > increase in supply, excess demand will be finally created. The excess demand will create competition among buyers; which will increase price & establish new equilibrium at higher price, more quantity.