Assumptions:

In the graph below, assume that the original demand and supply curves are given by D₁ and S₁ respectively.

Tasks:

1. Locate the original equilibrium point, graphically identifying both the original equilibrium price and quantity. Clearly label the equilibrium price as P₁ and equilibrium quantity as Q₁.
2. Now assume that supply decreases. How is this represented on the graph? Clearly show and label the changes.
3. Locate the new equilibrium point. What happens to the equilibrium price when supply decreases? What happens to the equilibrium quantity? Clearly label the new equilibrium price as P₂ and the new equilibrium quantity as Q₂.
4. Finally, discuss the idea of price as a rationing device in the context of this example. (Suggested response length: one paragraph or 3 to 4 sentences).