Question

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

Short answer

In the presence of inelastic supply, shifts in demand have a larger effect on the equilibrium price than on quantity. This is because the inelastic supply curve is relatively unresponsive to changes in price, while the demand shift causes substantial changes in the equilibrium price.

Step-by-step solution

Define Inelastic Supply

Inelastic supply refers to a situation where the quantity supplied of a good or service changes only slightly in response to changes in its price. It is often represented by a steep, almost vertical, supply curve in a supply-demand graph. In the context of this exercise, we assume that the supply curve is inelastic.

Consider the Shift in Demand

A shift in demand can occur for various reasons such as changes in consumers' preferences, income, or the prices of other related goods. When demand shifts, it affects the equilibrium price and quantity in the market. We need to analyze how a shift in demand impacts the equilibrium price and quantity, keeping in mind that supply is inelastic.

Analyze the Effect of the Shift on Equilibrium Price and Quantity

Since supply is inelastic, it is primarily the extent of the shift in demand that will determine the changes in equilibrium price and quantity. Consider the following two scenarios: 1) When demand increases, the demand curve shifts to the right. Given the nearly vertical, inelastic supply curve, the increase in demand primarily leads to a significant rise in the equilibrium price, while the change in quantity supplied will be comparatively small. 2) When demand decreases, the demand curve shifts to the left. Similarly, due to the inelasticity of the supply curve, the decrease in demand primarily results in a significant fall in the equilibrium price, while the change in quantity supplied remains relatively small.

Conclusion

In case of inelastic supply, shifts in demand have a larger effect on equilibrium price than on quantity. This is because the inelastic supply curve is relatively unresponsive to changes in price, while the shifts in demand cause substantial changes in the equilibrium price.