Question

3. The supply of beachfront property is inelastic. The supply of new cars is elastic. Suppose population growth causes demand for both goods to double (at each price, Q' doubles). a. For which product will change the most? b. For which product will change the most?

Answer 1

Answer

3. a. For beachfront property P will change the most.

The supply of beachfront property is inelastic, i.e., the responsiveness of the change in quantity supplied is less than the change in the price of beachfront property. So when the quantity demanded for beachfront property doubles for the rise in population, it is not possible to increase the supply of beachfront property enough to meet all the demands because the supply of beachfront property is limited and inelastic. Thus, the price(P) of beachfront property will increase more than the increase in the quantity supplied of beachfront property.

3. b. For new cars Q will change the most.

The supply of new cars is elastic, i.e., the responsiveness of the change in quantity supplied is more than the change in the price of new cars. So when the quantity demanded for new cars doubles for the rise in population, the price of the new cars will rise. Now as the supply of new cars is price elastic, the quantity supplied of new cars will be more than the rise of price of new cars. Thus the quantity supply of new cars will increase more than the increase of the price of new cars.

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The figure(1) above shows the market for beachfront property. Here,  the horizontal axis measures the quantity of beachfront property, and the vertical axis measures the price of beachfront property. The curve 'S' is the supply curve of of beachfront property. The curve 'D1' is the initial demand curve of beachfront property. At the initial level, the equilibrium price of beachfront property is P1, and the equilibrium quantity of beachfront property is Q1. After the increase of population, the demand for beachfront property gets double and the demand curve shifts rightward to D2. After tne increase of the demand for beachfront property, the equilibrium price rises to P2 , and the equilibrium quantity rises to Q2.

The figure(2) above shows the market for new cars. Here,  the horizontal axis measures the quantity of new cars, and the vertical axis measures the price of new cars. The curve 'S' is the supply curve of of new cars. The curve 'D1' is the initial demand curve of new cars. At the initial level, the equilibrium price of new cars is P1, and the equilibrium quantity of new cars is Q1. After the increase of population, the demand for new cars gets double and the demand curve shifts rightward to D2. After tne increase of demand for new cars, the equilibrium price rises to P2 , and the equilibrium quantity rises to Q2.

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