Question

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

Short answer

When demand is elastic, shifts in supply will have a larger effect on the equilibrium quantity than on the equilibrium price. This is because consumers are more responsive to price changes when demand is elastic, leading to larger changes in the quantity demanded than in the price due to changes in supply.

Step-by-step solution

Understanding Elasticity of Demand

Elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to a change in its price. In general, the more elastic the demand is, the more consumers will change the quantity they consume in response to a price change. If demand is elastic, it means that a small change in price leads to a relatively larger change in the quantity demanded.

Shifts in Supply

Shifts in supply can occur due to various factors such as changes in production costs or technological advancements. A shift in supply refers to a change in the quantity of a good/service that producers are willing and able to supply at each price level. When supply increases (the supply curve shifts to the right), the equilibrium quantity will increase, and the equilibrium price will decrease. Conversely, when supply decreases (the supply curve shifts to the left), the equilibrium quantity will decrease, and the equilibrium price will increase.

Effect of Shifts in Supply on Equilibrium Quantity and Price

To determine whether shifts in supply will have a larger impact on equilibrium quantity or price when demand is elastic, we can examine the relationship between demand elasticity and price changes. When demand is elastic, a small change in price will lead to a relatively larger change in the quantity demanded. Therefore, shifts in supply should have a larger impact on the equilibrium quantity than the equilibrium price in this scenario.

Conclusion

When demand is elastic, shifts in supply will have a larger effect on the equilibrium quantity than on the equilibrium price. This is because consumers are more responsive to price changes when demand is elastic, which means changes in supply will primarily result in changes in the quantity demanded in the market rather than significant changes in the price.