If the demand for a product is elastic and the supply curve shifts to the left due to increased production costs, what is the likely outcome for the equilibrium price and quantity?

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Equilibrium price will rise, and quantity will fall

Equilibrium price will fall, and quantity will rise

Equilibrium price will remain unchanged, and quantity will fall

Equilibrium price will rise, and quantity will remain unchanged

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Answer

When demand is elastic, buyers are very sensitive to price changes, so a small increase in price will cause a relatively large drop in the quantity demanded. If the supply curve moves leftward because producers now face higher costs, the new supply curve is higher for each quantity, which pushes the equilibrium price up. Because the demand curve is steep, the quantity that can be sold at the higher price falls sharply; the price rises but the quantity falls more noticeably. For example, if a bakery’s flour cost rises, the price of a loaf might rise from $2 to $2. 50, but the number of loaves sold could drop from 100 to 60.

Detailed Explanation

When supply moves left, fewer goods are available. Other options are incorrect because Some think a leftward supply shift lowers price because fewer goods mean less competition; A common mistake is to think price stays the same when supply drops.

Key Concepts

equilibrium price

shifts in supply curve

price elasticity of demand

Topic

Demand and Supply Basics

Difficulty

hard level question

Cognitive Level

understand

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