Answer to Question #67524 in Microeconomics for fifi

Question

7. Discuss why a simultaneous decrease in supply and increase in demand for lumber, has an ambiguous effect on equilibrium quantity of sawdust while the change in equilibrium price is certain.

Answer 1

decrease in supply lead to increase in price and decrease in quantity. Increase in demand lead to increase in price and increase in quantity. So, equilibrium price will increase, but effect on equilibrium quantity depends on level of changing of supply and demand. If decrease in supply bigger than increase in demand equilibrium quantity will decrease, on the other hand, if increase in demand bidder than decrease in supply equilibrium quantity will increase.