Chapter 5, Problem 1QE

To determine

Cause for the simultaneous rise in the price and quantity in the economy.

Explanation of Solution

The equilibrium price and quantity demanded in the economy are obtained at the intersection of the demand and supply curve in the economy. Thus, any shift in the demand or supply curves or the changes in both causes the equilibrium to change in the economy.

When the demand increases, the economy would face a temporary shortage of goods and services, which will increase the general price level in the economy. The increased demand and price influence the suppliers to increase their supply in order to earn higher revenue from the market. Thus, the simplest cause for the increase in the equilibrium price and quantity will be the rightward shift in the demand curve in the economy.

Economics Concept Introduction

Market equilibrium: Market equilibrium is obtained at the point where the market demand equals with the market supply in the economy. There will be no excess or shortage in the economy when the economy is in its equilibrium.