Question

Show with the help of a diagram, the effect on equilibrium price and quantity when:
(i) Demand is perfectly elastic and supply decreases.
(ii) Supply is perfectly inelastic and demand increases.
(iii) The demand curve is perfectly elastic and the supply curve shifts outwards.

Answer 1

(i) When demand is perfectly elastic and supply decreases, there will be no change in the price but the quantity decreases. In the diagram, when supply decreases from SS to $S_1{S}_1$, price remains constant at OP, but quantity decreases from OQ to $O{Q}_1$.



(ii) When supply is perfectly inelastic and demand increases, the price of the commodity will increase but the quantity remains constant. In the diagram, when demand increases from DD to $D_1{D}_1$, the price also increases from OP to $O{P}_1$, but quantity remains the same at OQ.



(iii) When demand is perfectly elastic and supply curve shifts to the right, there will be no change in the price but quantity will increase. In the diagram, when supply increases from SS to $S_1{S}_1$, price remains constant at OP, but the quantity increases from OQ to $O{Q}_1$.