Question

In December 2019, The Travel Industry Council of Hong Kong (TIC) announced that the average price of outbound travel during Christmas holidays dropped by 5% whereas the corresponding outbound travelers dropped by 15%, compared with the last year figures. The council explained that the change in figures were due to the growing consumers’ pessimism brought by Sino-US trade frictions and the social unrest.

(a). With the above figures, calculate the relevant price elasticity for outbound travel of Hong Kong. Briefly explain whether this represented the demand elasticity or supply elasticity. Was it elastic or inelastic?

(b). Draw a well-labeled supply-and-demand diagram to show the effects on the equilibrium price and quantity of outbound travel of Hong Kong. To better illustrate the elasticity calculated in (a), explain briefly whether you would use a steeper or flatter supply curve in the diagram. (You may refer to Figure 5 on p.101 of the textbook for your reference.)

Answer 1

Answer:

Price of Qutbound, Travel decreased by 5%. Quantity of outbound Trawless decreased by 15% Price Clanticity for Outbound Traud - so - 15% -5% AP This represents the Demand elasticity because consumer pessimism and social unrest are factors which decrease the demand, and therefore shift the demand curve to the left. So, the Elasticity is Demand Elasticity. The Demand is Elastic since it decreases by 15% due to a decrease in price by 5%.

In the diagram, the demand curve d and supply curve s intersect at point e which is the equilibrium point. then, due to consumer pessimism and social unrest, the demand falls. Due to this, the demand curve shifts leftward from d to d' the demand curve will be flatter since the price elasticity of demand is elastic[e>1]. the equilibrium quantity falls from q to q' and equilibrium price falls from p to p'. the new equilibrium is at point e' which is an intersection of s' and d'. the supply curve will remain as it is.it will not change. But demand curve will be flatter due to elastic demand