Answer to Question #260865 in Microeconomics for Jason

Question

With reference to the market for roses, and given the scenario explained in the excerpt, further assume that when the market opened up, the demand for roses increased. Explain, with the aid of a graph, the overall impact of these changes on the equilibrium price and quantity of roses.

(Note: Five marks for the graph and five marks for the explanation)

Answer 1

Equilibrium is obtained where demand and supply curve intersect each other. Demand curve is a downward sloping curve while supply curve is an upward sloping curve.

Increase in demand for roses leads to rightward shift in demand curve keeping supply curve constant.

Increase in demand leads to a rightward shift in demand curve from D to D1. Hence, equilibrium quantity increases from Q to Q1 and equilibrium price for roses increases from P to P1.

Therefore, increase in demand leads to increases in equilibrium quantity and equilibrium price.