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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

Starting from equilibrium in the market for electric scooters, the government increases the subsidy to buyers, which raises demand at every price, while supply stays unchanged. What happens to equilibrium price and quantity?

Both equilibrium price and quantity rise. The subsidy shifts the demand curve rightwards, creating excess demand at the old price. Price rises, and suppliers move up along their unchanged supply curve, increasing quantity traded to a new higher equilibrium.

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

Explanation

Demand shifts rightward along an unchanged upward-sloping supply curve. At the old price there is excess demand, which pushes price up. The higher price induces a movement along the supply curve, so quantity traded also rises. Price falling would require a rightward supply shift instead.

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