Model answer quiz 2: Amr Aboutaleb (11-02)

“As price falls, the quantity supplied falls. As supply increases, price falls.” Use supply and
demand analysis to explain why these two statements do not contradict each other.

Diagram A Diagram B

-The two statements do not contradict each other, “As price falls, quantity supplied falls” is the
basic law of supply showing that as price increases suppliers are more attracted to producing a
certain product because they are more willing and able to do so to make more profit, they are
directly proportional. Diagram A represents this statement. If p2 is the starting price and the
price decreases to p1, quantity supplied will also decrease to q1, vice versa. Diagram B
represents the second statement “As supply increases, price falls”, this is not quantity supplied,
it is supply changes due to non-price determinants, represented on the diagram by the supply
curve shift, in this case from S1 to S2. Before any change, the product is at an equilibrium
meaning the quantity supplied equals the quantity demanded. This is represented by the
intersection of the two curves. Initially between the demand curve and S1. When Supply
changes and shifts to the right (q2), at the same price, it is no longer at an equilibrium and there
is overproduction because the demand curve hasn’t shifted meaning the demand is not keeping
up with supply. If the demand curve hasn’t shifted, the quantity demanded needs to increase to
reach the supply curve. Quantity demanded changes as a result of price changes, according to
the law of demand. Quantity demanded and supplied will meet at a new equilibrium(q3) when
price falls, so Price falls from p1 to p2. To conclude, the two statements do not contradict
because in the first statement it is mainly related to quantity supplied which is a dependent
variable to price which is the independent variable. Whereas in the second statement, price is
the dependent variable as a result of change in supply due to other determinants.