Question 7

Price increases and Quantity decreases.

When supply decreases while demand remains constant, the equilibrium price rises and the equilibrium quantity falls. This is due to the scarcity created by the reduced supply, leading to higher prices and lower quantities sold in the market.

A) Quantity remains the same.

This option is incorrect because a decrease in supply, while demand stays constant, disrupts the equilibrium. The quantity cannot remain unchanged; it must adjust to the new market conditions.

B) Price remains the same.

This option is also incorrect. With a decrease in supply, the competition for the available goods increases, which drives the price up rather than keeping it stable.

C) Quantity increases.

This choice is incorrect because a decrease in supply typically leads to a reduction in the quantity available in the market. Therefore, it is not possible for the quantity to increase under these circumstances.

D) Price increases.

This option is correct. When supply decreases, the limited availability of goods causes sellers to raise prices, thereby increasing the equilibrium price in the market.

E) Quantity decreases.

This option is correct. A decrease in supply results in fewer goods being available for sale, which leads to a decrease in the equilibrium quantity as consumers can purchase less at the higher price.

F) Price decreases.

This option is incorrect. A reduction in supply, with demand remaining constant, leads to an increase in price rather than a decrease due to the limited availability of goods.

Conclusion

The correct answers, D and E, accurately describe the effects of a decrease in supply with constant demand: the equilibrium price increases while the equilibrium quantity decreases. All other options fail to reflect this economic principle, as they either suggest stability or an opposite effect contrary to market behavior.