Assume that at the current market price of $5 per unit of a good, you are...
Assume that at the current market price of $5 per unit of a good, you are willing and able to buy 20 units. Last year at a price of $4 per unit, you purchased 20 units. What has most likely happened over the last year?
a. Supply has increased.
b. Demand has decreased.
c. Demand has increased.
d. Quantity supplied has decreased.
e. Supply has decreased.
Homework Answers
Answer: e. Supply has decreased.
The given scenario says that the price has increased from $4 to $5, but the quantity remains the same at 20 units. (willing and able to buy – these words denote it is demand) This means that the demand is perfectly inelastic. Perfectly inelastic demand curve is a vertical line in which demand is constant regardless of price. This implies that the customers are ready to pay any price for the product.
In the above diagram, demand curve D is perfectly inelastic at 20 units. When supply decreases from SS to S1S1 (supply curve shifts to the left due to decrease in supply), price rises from $4 to $5 as the demand is fixed at 20 units.
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