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Chapter 5: Q. 16 (page 130)

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

Short Answer

Expert verified

The larger effect will be on equilibrium price.

Step by step solution

01

Step 1.  Introduction

Elasticities of less than one show low price sensitivity and corresponds to inelastic demand.

02

Step 2. Explanation

Suppose there is a technological change in the market which causes the supply curve to shift to the right. If demand is inelastic, then due to a shift in the supply curve, the price of the commodity will reduce considerably as the supply increases. However, there will be a less impact on the quantities sold.

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Most popular questions from this chapter

From the data in Table 5.5 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H. Classify the elasticity at each point as elastic, inelastic, or unit elastic.

PointsPQ
A603,000
B702,800
C802,600
D902,400
E1002,200
F1102,000
G1201,800
H1301,600

Table 5.5

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.

What is the relationship between price elasticity

and position on the demand curve? For example, as you

move up the demand curve to higher prices and lower

quantities, what happens to the measured elasticity?

How would you explain that?

What is the price elasticity of demand? Can you explain it in your own words?

In a market where the supply curve is perfectly

inelastic, how does an excise tax affect the price paid by

consumers and the quantity bought and sold?
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