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What happens if supply and demand both decrease?

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posted Jul 12 by Reshmi S

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1 Answer

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If demand and supply both fall, quantity traded will fall. This is logical. If demand decreases, the price would decrease because if a good or service is unwanted, then companies cannot sell it if they maintain the current price. The price must decrease.

However, if supply decreases, the price would INCREASE because there is fewer amount of this good or service on the market. Therefore, its scarcity leads to its higher price. We have reasoned that if D and S decrease, quantity will decrease. However, we cannot determine the effects of price unless we know exactly the amounts by which demand and supply has decreased.

Therefore, if you draw a supply-demand curve, the equilibrium will shift horizontally left.

answer Jul 13 by Anushka
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