Chapter 5: Problem 17

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

Short Answer

Expert verified

When supply is elastic, shifts in demand will have a larger effect on the equilibrium quantity than on the equilibrium price. This is because producers are more responsive to changes in price, resulting in more significant changes in the quantity supplied.

Step by step solution

Understand the concept of elasticity

Elasticity is a measure of how much a change in one variable affects the change in another variable. In the context of supply and demand, the price elasticity of supply measures the responsiveness of the quantity supplied to a change in price. When supply is elastic, a small change in price leads to a relatively large change in the quantity supplied. This indicates that producers are more willing to adjust their production levels in response to changes in price.

Analyze shifts in demand

A shift in demand occurs when there is a change in any non-price determinant of demand, such as income, population, preferences, or prices of related goods. This will cause the entire demand curve to either shift to the right (increase in demand) or to the left (decrease in demand).

Determine the initial equilibrium

In a competitive market, the equilibrium is the point where the supply and demand curves intersect. At this point, the quantity supplied equals the quantity demanded, and the market-clearing price is determined.

Evaluate the effect of a shift in demand on the equilibrium with elastic supply

When supply is elastic, and there is a shift in demand, the supply curve adjusts relatively easily to the new demand curve. Thus, the equilibrium quantity will change more substantially than the equilibrium price. For example, suppose there is an increase in demand (demand curve shifts to the right). With elastic supply, producers are more willing to increase their production levels in response to a higher price. As a result, the equilibrium quantity will increase significantly, while the equilibrium price will increase less significantly. Conversely, if there's a decrease in demand (demand curve shifts to the left), the equilibrium quantity will decrease significantly, and the equilibrium price will decrease less significantly.

Conclusion

When supply is elastic, shifts in demand will have a larger effect on the equilibrium quantity than on the equilibrium price. This occurs because producers are more responsive to changes in price, allowing for more significant changes in the quantity supplied.