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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

A shift in supply will have a greater impact on the price equilibrium.

Step by step solution

01

Definition

Inelastic supply :

Inelastic supply occurs when the change in quantity supplied is smaller than the change in price for a product. It suggests the supply curve is steeper and the slope is higher. It demonstrates that supply elasticity is less than one.

02

Explanation

Demand will have a greater impact on equilibrium, price, or quantity as elastic shifts. A movement in the supply curve will modify the equilibrium price more than the equilibrium quantity with a vertical, or inelastic, demand curve.

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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鈥檚 product at the current price is 1.4, would you advise the company to raise the price, lower the price, or keep the price the same? What if the elasticity were 0.6? What if it were 1? Explain your answer.

Assume that the supply of low-skilled workers is fairly elastic, but the employers鈥� demand for such workers is fairly inelastic. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor? What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams.
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