Question

The previous section explained how a supply curve can be vertical. If a supply curve is vertical, does it follow that supply is (a) elastic, (b) inelastic, (c) unit-elastic, or (d) none of the above? Explain your answer.

Short answer

When a supply curve is vertical, it means that the supply is inelastic. This is because the quantity supplied does not change regardless of changes in price.

Step-by-step solution

Conceptual Understanding

Understand that when we talk about a vertical supply curve, it means that the quantity supplied does not change regardless of the price. The quantity remains the same no matter how much the price fluctuates.

Matching concepts

Now, match the above understanding with the concepts of elasticity. Elasticity measures the responsiveness of quantity supplied to a change in price. If the supply curve is vertical, it indicates that the quantity supplied does not respond to price changes. This situation corresponds to the concept of inelastic supply.

Conclusion

Given these, it is concluded that when a supply curve is vertical, the supply is categorized as inelastic. In other words, the quantity supplied is unaffected by price changes.

Key concepts

Price Elasticity of Supply

Price elasticity of supply is a pivotal concept in economics. It quantifies how the quantity of a good produced and offered for sale by producers responds to a change in the price of that good. When supply is elastic, a small price increment leads to a large increase in the quantity supplied. Conversely, if supply is inelastic, changes in price have little to no effect on the amount of the good that suppliers are willing to bring to market.

To mathematically determine this, economists use the price elasticity of supply (PES) formula:
Consider the formula:
\[ PES = \frac{\text{Percentage change in quantity supplied}}{\text{Percentage change in price}} \]

When PES is greater than one, supply is considered elastic. Conversely, if PES is less than one, the supply is said to be inelastic. A PES of exactly one indicates unit-elasticity, where the quantity supplied changes proportionately with price. Understanding this measure is crucial for both businesses and policymakers to predict market responses to price changes.

Inelastic Supply

Inelastic supply refers to a situation where the quantity supplied of a good is not significantly affected by changes in its price. This might occur for various reasons, such as limitations in production technology, the physical scarcity of materials, or legal constraints.

For instance, imagine a rare mineral with a fixed amount that cannot be increased, even if its price skyrockets. For such goods, the supply curve would appear as a vertical line on a graph, implying no matter what the price is, the quantity supplied remains the same – perfectly inelastic.

In practical terms, goods with inelastic supply can lead to pronounced fluctuations in price in response to shifts in demand. If demand suddenly spikes, but the supply cannot be increased, prices may significantly rise as consumers compete to purchase the limited quantity of the good available.

Economic Concepts

Economics brims with concepts that help us understand how markets function. Not only does it investigate how goods and services are produced, distributed, and consumed, but it also provides tools to analyze human behavior and decision-making in financial contexts.

Key Economic Principles

Some of the foundational economic concepts include scarcity, which necessitates choices and trade-offs due to limited resources; efficiency, which involves making the best use of resources; and markets, where buyers and sellers interact to exchange goods and services.

Equilibrium, another crucial concept, is the point at which supply equals demand. At this juncture, the market is stable, and the 'invisible hand' of the market operates, aligning the interests of individuals and society as a whole.

By delving into these economic principles, we gain the analytical framework necessary to comprehend and predict the behavior of markets and the impact of economic policies.

Supply and Demand

Supply and demand are the bedrock of market economies and constitute one of the most fundamental frameworks of economic analysis. The law of supply posits that a higher price leads to a higher quantity supplied, all else being constant. The law of demand suggests that a higher price will typically result in a lower quantity demanded.

Market equilibrium occurs where the supply and demand curve intersect. At this point, the price of a good or service is stable, and the quantity produced matches the quantity consumers wish to buy. Markets continually seek this balance, and any shift in supply or demand can disrupt it, leading to a new equilibrium point.

Understanding the dynamics of supply and demand helps in deciphering how various factors such as consumer preferences, production costs, and external events impact the price levels and quantities of goods and services in a market.