what happens to equilibrium price and quantity when supply is prefectly inelastic and demand changes
what happens to equilibrium price and quantity when supply is prefectly inelastic and demand changes
Hi Manya,
The analysis of changes in demand with perfectly inelastic supply curve involves the following two different situations.
a. Increase in demand with perfectly inelastic Supply
The perfectly inelastic supply is represented by the vertical supply curve parallel to the y-axis/price-axis. With the increase ( upward shift ) in the downward sloping demand curve, the equilibrium price will rise leaving the equilibrium output unchanged.
b. Decrease in demand with perfectly inelastic supply
Now in the opposite case, where demand decreases with perfectly inelastic supply curve. As demand decreases, the equilibrium price will be lower,whereas, the equilibrium output level remained the same.
Thus, we can conclude that when supply is perfectly inelastic, the change in demand fully affects the equilibrium price leaving the output level unchanged.
Hi Manya,
The analysis of changes in demand with perfectly inelastic supply curve involves the following two different situations.
a. Increase in demand with perfectly inelastic Supply
The perfectly inelastic supply is represented by the vertical supply curve parallel to the y-axis/price-axis. With the increase ( upward shift ) in the downward sloping demand curve, the equilibrium price will rise leaving the equilibrium output unchanged.
b. Decrease in demand with perfectly inelastic supply
Now in the opposite case, where demand decreases with perfectly inelastic supply curve. As demand decreases, the equilibrium price will be lower,whereas, the equilibrium output level remained the same.
Thus, we can conclude that when supply is perfectly inelastic, the change in demand fully affects the equilibrium price leaving the output level unchanged.
