Chapter 5: Problem 16

If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?

Short Answer

Expert verified

In conclusion, when demand is inelastic, shifts in supply will have a larger effect on equilibrium price than on quantity. This is because the quantity demanded is less responsive to changes in price in such a scenario, making the impact on price change more significant.

Step by step solution

Define Inelastic Demand

Inelastic demand is a scenario in which the quantity demanded by consumers does not change significantly when the price changes. In other words, it means that the % change in quantity demanded is less than the % change in price. The price elasticity of demand (PED) coefficient, which measures the responsiveness of demand, is less than 1 for inelastic demand.

Review the Supply and Demand Model

The basic principles of supply and demand state that typically, an increase in price will result in a decrease in quantity demanded (usually with a downward-sloping demand curve) and an increase in quantity supplied ( usually with an upward-sloping supply curve). When these two curves intersect, we get the equilibrium price and quantity.

Analyze the Effect of a Shift in Supply on Inelastic Demand

Considering an inelastic demand, where consumers' response to price change is low, a change in supply will primarily impact the equilibrium price and have a smaller effect on the quantity. Let's investigate two scenarios: 1. If the supply increases (rightward shift of the supply curve), the equilibrium price will decrease. However, due to the inelastic nature of demand, the quantity demanded will not increase significantly, leading to a larger effect on price. 2. If the supply decreases (leftward shift of the supply curve), the equilibrium price will increase. Again, due to the inelastic demand, the quantity demanded will not decrease significantly, resulting in a larger effect on price.