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

Which of the following would, by itself, lead to a fall in the equilibrium price of wheat flour with equilibrium quantity rising?

A bumper harvest shifts the supply curve to the right, creating a surplus at the old price. Price falls, and consumers buy more along the demand curve, so equilibrium price falls while equilibrium quantity rises.

  1. AA rightward shift of the supply curve due to a bumper harvestCorrect
  2. BA leftward shift of the supply curve due to a drought
  3. CA rightward shift of the demand curve due to higher incomes
  4. DA leftward shift of the demand curve due to a fall in consumer tastes

Explanation

An increase in supply creates a surplus at the old price, so price falls and quantity demanded expands, raising equilibrium quantity. A drought reduces supply and raises price. Higher incomes raise both price and quantity. A fall in demand lowers both price and quantity.

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