Your fruit stall has 100 ripe peaches that must be sold at once. Your supply curve for peaches is vertical. From past experience, 100 peaches are demanded if the price is K1. The demand elasticity is −0.5. (10 Marks)

Question

Your fruit stall has 100 ripe peaches that must be sold at once. Your supply curve for peaches is vertical. From past experience, 100 peaches are demanded if the price is K1. The demand elasticity is −0.5. (10 Marks)

i. Draw a supply and demand diagram showing market equilibrium.
ii. You discover 10 of your peaches are rotten and cannot be sold. Draw the new supply curve.

Answer 1

i. In the supply and demand diagram, the vertical supply curve represents the fixed supply of 100 peaches. The demand curve is downward sloping with a quantity demanded of 100 peaches at price K1. The market equilibrium is where the supply curve and the demand curve intersect, resulting in a price of K1 and a quantity of 100 peaches.

ii. After discovering that 10 peaches are rotten and cannot be sold, the new supply curve will shift to the left. The supply curve will now be represented by a vertical line at 90 peaches instead of 100. The demand curve remains the same. The new market equilibrium will be at a higher price and a lower quantity of peaches compared to the original equilibrium. The exact values will depend on the specific shifts of the supply and demand curves.