what happens to equilibrium price and quanity when demand is prefectly elastic and supply changes
what happens to equilibrium price and quanity when demand is prefectly elastic and supply changes
Hi Manya,
When Demand is Perfectly Elastic and Supply Changes
The analysis of changes in supply with perfectly elastic demand curve involves two different situations.
a. Increase in supply with perfectly elastic demand
When demand is perfectly elastic i.e it is parallel to the X-axis, an increase (rightward shift) in the upward sloping supply curve will result in rise in the equilibrium output leaving the equilibrium market price unchanged.
b. Decrease in supply with perfectly elastic demand
In the reverse case, where the supply decreases. The new equilibrium output is reduced and there is no change in the equilibrium price.
Thus, when demand is perfectly elastic, increase or decrease in supply is fully reflected in quantity without any change in the price.
Hi Manya,
When Demand is Perfectly Elastic and Supply Changes
The analysis of changes in supply with perfectly elastic demand curve involves two different situations.
a. Increase in supply with perfectly elastic demandWhen demand is perfectly elastic i.e it is parallel to the X-axis, an increase (rightward shift) in the upward sloping supply curve will result in rise in the equilibrium output leaving the equilibrium market price unchanged.
b. Decrease in supply with perfectly elastic demand
In the reverse case, where the supply decreases. The new equilibrium output is reduced and there is no change in the equilibrium price.
Thus, when demand is perfectly elastic, increase or decrease in supply is fully reflected in quantity without any change in the price.
