Correct Option
The correct option is 1, 2 and 3.
Explanation
Market equilibrium occurs where the quantity demanded equals the quantity supplied. A leftward shift in the demand curve represents a decrease in demand, meaning consumers are willing to purchase less quantity at every given price level. The supply curve remains unchanged when the number of firms is fixed.
Statement-wise Analysis
- Statement 1 is Correct: When the demand curve shifts to the left, at the initial equilibrium price ($P_0$), the quantity demanded falls ($Q_1$) while the quantity supplied remains at the original level ($Q_0$). Since $Q_0 > Q_1$, there is an excess supply in the market.
- Statement 2 is Correct: Due to the excess supply, firms accumulate unsold inventory. To clear this stock and sell their desired quantity, firms respond to market pressure by lowering their prices.
- Statement 3 is Correct: As the price decreases, the quantity demanded increases (movement along the new demand curve) and the quantity supplied decreases (movement along the supply curve). This adjustment continues until a new equilibrium is reached. This new intersection point corresponds to a lower price and a lower quantity than the initial equilibrium.
Key Takeaway
Key Takeaway: A decrease in demand (leftward shift), with supply held constant, results in excess supply at the original price, leading to a fall in both the equilibrium price and the equilibrium quantity.