Answer to Question #194688 in Microeconomics for shabbir

Question

The equilibrium price of teaset rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic.

 

Amena: Demand increased, but supply was totally inelastic.

Faisal: Supply increased, but so did demand.

Amena: Supply decreased, but demand was totally inelastic.

 

 

Answer 1

Amena's explanation was right, the demand for teaset increased but the supply was inelastic. Since the demand was high, the suppliers who had the teaset had to take advantage of the situation and sell at higher prices so as to make more profits during that period.