Explain what is wrong with the following statement. "A decrease in supply will lead to an...
Explain what is wrong with the following statement. "A decrease in supply will lead to an increase in the price, which decreases demand, thus lowering price. Thus, a decrease in supply has no effect on the price of a good."
Homework Answers
Thus, a decrease in supply has no effect on the price of a good. This statement is wrong
A decrease in supply will increase the price which lowers the price of a good as a result demand also decreases which lower the prices. This will happen only if the decrease in demand is exactly equal to a decrease in supply in that case only there is no change in the price of a commodity. But if the decrease in supply is larger than the decrease in demand price will increase. Similarly, if the decrease in demand is higher than the decrease in supply the price will decrease.
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