Question

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

Short answer

In summary, when supply is elastic, shifts in demand have a larger effect on equilibrium quantity than on price due to the ability of suppliers to quickly adjust their production levels in response to changes in demand.

Step-by-step solution

1. Understanding the terms

First, let's define the terms associated with the exercise: - Elastic Supply: When suppliers can easily change the quantity supplied in response to changes in price, it is known as elastic supply. In other words, supply is sensitive to price changes. - Demand: The demand for a good or service is the number of goods that people are willing and able to purchase at various prices during a given time period. - Equilibrium Quantity: The quantity at which the demand and supply of a good or service are equal. - Equilibrium Price: The price at which the demand and supply of a good or service are equal.

2. Analyzing the impact of shifts in demand on equilibrium quantity and price

When supply is elastic, suppliers can quickly adjust their production in response to changes in demand. Let's consider two scenarios to analyze the impact of shifts in demand on equilibrium quantity and price. Scenario 1: Increase in Demand If demand increases, the demand curve will shift to the right. With an elastic supply, suppliers can easily increase production to meet the higher demand, leading to a greater change in equilibrium quantity than price. In this scenario, the increase in demand will have a larger effect on equilibrium quantity than on price. Scenario 2: Decrease in Demand If demand decreases, the demand curve will shift to the left. With an elastic supply, suppliers can quickly reduce their production in response to the lower demand, leading to a greater change in equilibrium quantity than price. In this scenario, the decrease in demand will have a larger effect on equilibrium quantity than on price.

3. Conclusion

When supply is elastic, shifts in demand have a larger effect on equilibrium quantity than on price. This is because suppliers can easily adjust production levels in response to changes in demand without causing significant changes in price.