Question:
In a competitive market for cinnamon, 10 million kg were sold for Rs. 900 in 2016. In 2017, 10 million kg were sold for Rs. 800. Which changes in demand and supply could have caused this?
(1) Inc / Inc
(2) Dec / Dec
(3) Dec / Inc
(4) Inc / Dec
(5) Dec / No change
Correct Answer:
(3)
Answer Explanation:
The equilibrium quantity remained identical (10m), but the price dropped (900 to 800). A decrease in demand lowers both price and quantity. An increase in supply lowers price but raises quantity. If they happen simultaneously, their opposing quantity effects can cancel out (leaving Q unchanged), while their price effects compound to significantly lower the price.
Topic: Market Equilibrium Year: 2018
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