Under normal downward sloping demand curve and fully elastic supply curve of a commodity, an exogenous decrease in demand would lead to
- A.increase in equilibrium price and quantity
- B.decrease in equilibrium price and quantity
- C.decrease in equilibrium quantity and no change in price
- D.increase in equilibrium price and no change in quantity
Correct answer
Explanation
The correct answer is C, decrease in equilibrium quantity and no change in price. A fully (perfectly) elastic supply curve is a horizontal line: sellers will supply any quantity at one fixed price and nothing below it. When demand falls for a reason outside the market, the downward sloping demand curve shifts to the left. It now cuts the flat supply curve further to the left but at the same height, so buyers purchase less while the price stays exactly where it was. The whole adjustment falls on quantity. Option A is wrong because a fall in demand cannot raise both price and quantity. Option B is wrong because price falls along with quantity only when the supply curve slopes upward. Option D is wrong because a rise in price with no change in quantity needs a perfectly inelastic (vertical) supply curve and a rise in demand. Exam tip: horizontal supply, demand shifts change only quantity; vertical supply, demand shifts change only price.
Practice Questions
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- B.imperfect competition
- C.monopolistic competition
- D.oligopoly
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- A.1 and 3 only
- B.2 and 3
- C.2 and 4
- D.1, 3 and 4
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- A.3 only
- B.1 and 3 only
- C.1 and 2 only
- D.1, 2 and 3
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- A.1 and 2 only
- B.1, 2 and 3
- C.3 only
- D.2 and 3 only
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- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
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