Question

***Microeconomics***

*please answer the question clearly and with steps* I just started to learn Microeconomics.

People buy red roses throughout the year. However, as Valentine’s Day approaches, which has become an occasion less about loving and more about spending on roses, it is observed that the average price of red roses rises by 85%, while its sales volume rises by 34%.

a. With the above figures, calculate the relevant price elasticity for red roses. Briefly explain whether this represented the demand elasticity or supply elasticity. Interpret the value.

b. Show the effect of the above situation in a well-labeled supply-and-demand diagram on the equilibrium price and quantity. Explain briefly whether you would use a steeper or flatter supply curve to illustrate this situation.

Answer 1

Price elasticity

= % change in sales volume/ % change in price

=34/85

=0.4

This represented the elasticity of supply as we have calculated the percentage change in sales volume ie. supply due to one percent change in price. We have not incorporated the change in demand in our elasticity calculation. Hence, it is not the elasticity of demand.

The value obtained is 0.4. This means if the price increases by 20%, the sellers can expect the sales volume to go up by 0.4x20% = 8%.

A steeper supply curve is used as the elasticity of supply is relatively inelastic. 0<e_s<1

As shown in the diagram, when the price rises by the extent P_oP_1, sales volume rises by a smaller amount Q_oQ_1.