Answer to Question #223714 in Economics of Enterprise for sakin

Question

The price of coffee rose sharply last month, while the quantity sold remained the

same. Five people suggest various explanations:

Leonard: Demand increased, but supply was perfectly inelastic.

Sheldon: Demand increased, but it was perfectly inelastic.

Penny: Demand increased, but supply decreased at the same time.

Howard: Supply decreased, but demand was unit elastic.

Raj: Supply decreased, but demand was perfectly inelastic.

Who could possibly be right? Use graphs to explain your answer.

Answer 1

Solution:

The person who is right is Raj: Supply decreased, but demand was perfectly inelastic.

 

This is because when the supply of a particular good decreases, its price will tend to increase sharply due to scarcity. However, the demand was perfectly inelastic which means that the quantity demanded is unresponsive to price changes. That is any change in the price of a good or service has no effect on the quantity demanded or supplied since it has a zero elasticity of demand or supply.

Therefore, this means that the supply of coffee decreased forcing the sellers to increase their prices due to scarcity but since the demand was perfectly inelastic, the quantity sold remained the same as the quantity demanded was unresponsive to price changes.