Problem 15 If demand is elastic, will shift... [FREE SOLUTION]

Chapter 5: Problem 15

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

Short Answer

Expert verified

When demand is elastic, shifts in supply have a larger effect on equilibrium quantity than on price. This is because, with elastic demand, the percentage change in quantity demanded is greater than the percentage change in price. As a result, when supply increases, the equilibrium quantity increases more significantly than the decrease in price; and when supply decreases, the equilibrium quantity decreases more significantly than the increase in price.

Step by step solution

Understand Elastic Demand:

Elastic demand occurs when the percentage change in quantity demanded is greater than the percentage change in price. In other words, when the price of a good increases, the quantity demanded will decrease by a larger percentage. Conversely, when the price decreases, the quantity demanded will increase by a larger percentage. This is represented by an absolute value of the price elasticity of demand greater than 1.

Understanding Equilibrium:

The equilibrium price and quantity in a market are determined by the intersection of the supply and demand curves. At this equilibrium point, the quantity demanded equals the quantity supplied, ensuring there is no shortage or surplus of the good.

Analyzing Shifts in Supply:

When supply shifts, it can either shift to the right (increase) or the left (decrease). An increase in supply occurs when the supply curve shifts to the right, implying that producers are willing to supply more of the good at each given price. A decrease in supply occurs when the supply curve shifts to the left, implying producers are willing to supply less of the good at each given price.

Impact on Equilibrium Quantity and Price:

When the supply curve shifts and the demand is elastic, we need to analyze the impact on equilibrium quantity and price. 1. Increase in supply: When supply increases (shifts to the right), the equilibrium price will decrease, and the equilibrium quantity will increase. In this scenario, because the demand is elastic, the quantity demanded will increase by a larger percentage than the decrease in price. Therefore, when demand is elastic, shifts in supply have a larger effect on equilibrium quantity. 2. Decrease in supply: When supply decreases (shifts to the left), the equilibrium price will increase, and the equilibrium quantity will decrease. In this scenario, because the demand is elastic, the quantity demanded will decrease by a larger percentage than the increase in price. Therefore, when demand is elastic, shifts in supply have a larger effect on equilibrium quantity. In conclusion, when demand is elastic, shifts in supply have a larger effect on equilibrium quantity than on price.