Consider Figure 4-1. The current demand and supply curves are D 1 , and S 1 ,
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Consider Figure 4-1. The current demand and supply curves are D1, and S1, at which the equilibrium price and quantity are P1 and Q1. If firms adopt a cost-reducing technique for producing this good, which curve shifts, and in which direction does it shift? What happens to the market clearing price and to the equilibrium quantity?
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FIGURE 4-1 Shifts in Demand and in Supply: In panel (a), supply is unchanged at S. The demand curve shifts rightward from to D to D. The equilibrium price and quantity rise from P, Q to P, Q, respectively. In panel (b), the supply curve is unchanged at S. The demand curve shifts leftward from D to D3. Both equilibrium price and equilibrium quantity fall. In panel (c), demand now remains P P Panel (a) Increase in Demand E Q E Q D S Determinate Results unchanged at D. The supply curve shifts from S to S. The equilibrium price falls from P to P. The equilibrium quantity increases, however, from Q to Q. In panel (d), demand is unchanged at D. The supply curve shifts leftward from S to S3. The market clearing price increases from P to P3. The equilibrium quantity falls from Q to Q3. D P P3 Panel (b) Decrease in Demand E3 L E D3 Q S D
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