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

When demand is inelastic, shifts in supply have a larger effect on equilibrium price compared to quantity. This is due to the steeper demand curve indicating inelastic demand, resulting in a more significant influence on price changes as supply shifts, while the changes in equilibrium quantity remain relatively smaller.

Step by step solution

Understanding demand elasticity

First, we need to understand the concept of elasticity. Demand is said to be inelastic when its elasticity is less than 1. It means the percentage change in quantity demanded is smaller than the percentage change in price. In this situation, the demand curve will be steeper.

Visualizing demand and supply shifts

To analyze the effect of shifts in supply on equilibrium price and quantity, we can visualize the demand and supply curves on a graph. The demand curve will be steep due to inelastic demand, and the supply curve will be the typical upward sloping curve. The intersection of these two curves represents the market equilibrium, where the quantity demanded equals the quantity supplied.

Analyzing the effect of an increase in supply

Let's first consider the case when supply increases. An increase in supply causes the supply curve to shift to the right, which results in a new market equilibrium. Notice that in this scenario, there will be a drop in the equilibrium price and an increase in the quantity supplied. However, due to inelastic demand, the increase in quantity will be relatively smaller than the decrease in price.

Analyzing the effect of a decrease in supply

Now let's consider the case when supply decreases. A decrease in supply causes the supply curve to shift to the left, which again changes the market equilibrium. In this scenario, the equilibrium price will increase, and the quantity supplied will decrease. As before, due to inelastic demand, the decrease in quantity will be relatively smaller than the increase in price.

Conclusion

When demand is inelastic, shifts in supply have a larger effect on equilibrium price than on quantity. This is because the inelastic demand results in a steeper demand curve and any shifts in supply will have a more significant influence on price rather than quantity.