Answer to Question #245358 in Macroeconomics for josh

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

The price elasticity of demand refers to the degree of responsiveness of change in the quantity demanded due to change in price.

Given the condition where the prices of coffee have been increased last month and the quantity sold remains constant. Some people have suggested there opinions regarding these conditions.

Person L suggested on increase in the demand curve with the perfectly inelastic supply curve that is with zero elasticity. Diagrammatically, it can be represented as follows:

This can be possible because it fulfills the given condition that is due to increase in the demand, the prices have also been increased.

Person S suggested on increase in the demand curve with inelastic demand. Diagrammatically, it can be represented as follows:

This cannot be possible because it fulfills the condition of increase in the prices but it does not keep the quantity sold constant rather it has been increased from Q to Q₁.

Person P suggested on increase in the demand curve and a reduction in supply curve. Diagrammatically, it can be represented as follows:

This cannot be possible because it fulfills the condition of increase in the prices but it does not keep the quantity to be constant. This is because the proportion of change in the supply and demand is not the same.

Person H suggested on fall in the supply curve and demands to be unitary elastic. Diagrammatically, it can be represented as follows:

This cannot be possible because it is not given whether the changes made in unitary elastic have been increased or decreased. It fulfils only the condition of increase in the prices.

Person R suggested on fall in the supply curve and demands to be unitary elastic. Diagrammatically, it can be represented as:

This can be possible because it fulfills the given condition that is due to fall in the supply, the prices have also been increased.

Hence, the explanation given by person L and person R is correct.