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

For goods with inelastic demand, shifts in supply will have a larger effect on the equilibrium price compared to the equilibrium quantity. This is because the steepness of the inelastic demand curve implies that consumers are not very responsive to changes in price, and thus, the equilibrium price change will be more significant than the equilibrium quantity change.

Step by step solution

Review the basics of supply and demand

Let's start by reviewing the critical concepts of supply and demand. The interaction between the supply and demand curves determines both the equilibrium price and quantity for a given market. The point where the supply and demand curves meet is called the equilibrium point.

Understand the inelastic demand curve

Now we need to analyze the demand curve when it's inelastic. An inelastic demand curve is steep, meaning consumers are not responsive to changes in the price of a good or service. Therefore, if the price increases, the quantity demanded does not decrease significantly; similarly, if the price falls, the quantity demanded does not rise significantly.

Identify a shift in supply

A shift in the supply curve can result from various factors such as changes in production cost, technology advancements, or maybe government regulations. When the supply curve shifts, either to the right (an increase in supply) or to the left (a decrease in supply), it affects the equilibrium price and quantity.

Analyze the effect of supply shifts on inelastic demand

When there is a supply shift and the demand is inelastic, the steepness of the demand curve means that the quantity demanded will not change significantly even though the price may change. In this case, the equilibrium point will move along the demand curve primarily in the price-axis direction. This means that the change in the equilibrium price will be more significant than the change in the equilibrium quantity.

Conclusion

In conclusion, for goods with inelastic demand, shifts in supply will have a larger effect on the equilibrium price compared to the equilibrium quantity. The steepness of the inelastic demand curve means that consumers are not very responsive to changes in price, and thus, the equilibrium price change will be more significant than the equilibrium quantity change.