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CA Foundation · Business Economics · Price Determination in Different Markets

In a perfectly competitive market, the equilibrium price is determined by the interaction of market demand and market supply. If market demand increases while supply remains unchanged in the short run, what happens to the equilibrium price and quantity?

Both equilibrium price and quantity rise. An increase in demand with supply unchanged creates excess demand at the old price, pushing the price up. The higher price encourages sellers to supply more along the same supply curve, so the quantity traded also increases.

  1. APrice rises and quantity risesCorrect
  2. BPrice rises and quantity falls
  3. CPrice falls and quantity rises
  4. DPrice and quantity both remain unchanged

Explanation

A rightward shift of the demand curve along an unchanged upward-sloping supply curve creates excess demand at the old price. Price rises, and the higher price induces firms to move up along the supply curve, so quantity also rises. A fall in quantity would happen only if supply decreased.

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