Hi, the answer is given in the bold, but I have failed to understand it, please explain
Question:
Hi, the answer is given in the bold, but I have failed to understand it, please explain with graphs in another way? thanks
Consider a competitive market which can be well described by standard supply and demand curves with the conventional slopes. Assume the curves are neither perfectly elastic nor perfectly inelastic. Now suppose there is some disturbance to the market such that one or both of the curves shifts, and suppose you know the direction of the shift(s). When is it the case that the effect on price is ambiguous (i.e. you can't be sure if it will go up or down)? When is it the case that the effect on quantity is ambiguous? Support your answer with graphs.
This question can be quickly answered with four graphs in two groups:
The effect on price is ambiguous when demand and supply move in the same direction: either they both increase (i.e. shift right; graph #1) or both decrease (i.e. shift left; graph #2). In both of these cases, the effect on quantity is clear (it will go up in the first case and down in the second), but the effect on price depends both on which of the two shifts is larger, and on the elasticities of both supply & demand.
The effect on quantity is ambiguous when demand and supply move in opposite directions: if supply decreases and demand increases, we know that the price will rise (and vice versa), but we don't know what will happen to the quantity (ditto).
If only one curve shifts at a time, there is no ambiguity unless one of the curves has a very unusual shape (e.g. if it bends backwards over itself), but this was ruled out by assumption as part of the question.