Question

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

Short answer

When supply is inelastic, shifts in demand will have a larger effect on the equilibrium price than on quantity. This is because the steepness of the inelastic supply curve results in a substantial price change but a relatively small change in quantity as demand shifts.

Step-by-step solution

Understand the inelastic supply

Inelastic supply means that the quantity supplied doesn't change much when there is a change in price. In other words, the responsiveness of the supply to price changes is low. It is represented by a steep supply curve on the supply and demand graph.

Analyze shifts in demand

Shifts in demand occur when there is a change in any factor, other than price, that affects the quantity demanded. For example, changes in income, population, consumer preferences, or prices of related goods can lead to shifts in demand. When demand shifts, the entire demand curve will either move to the right (increase in demand) or to the left (decrease in demand).

Identify the changes in equilibrium price and quantity

In the supply and demand model, the equilibrium price and quantity occur where the supply and demand curves intersect. When demand shifts while supply remains inelastic, this intersection point will move along the inelastic supply curve.

Observe the effect on equilibrium price

When demand increases (shifts to the right) with inelastic supply, the equilibrium price tends to increase by a considerable amount. Conversely, when demand decreases (shifts to the left), the equilibrium price tends to decrease substantially. This is because the inelastic supply curve is steep, which means that even small changes in quantity result in large changes in price.

Observe the effect on equilibrium quantity

With an inelastic supply curve, changes in equilibrium quantity will generally be smaller as a result of shifts in demand. Since the supply curve is steep, it shows that suppliers are not highly responsive to price changes, and hence, the quantity supplied will remain relatively stable even with changes in demand.

Conclusion

In conclusion, when supply is inelastic, shifts in demand will have a larger effect on the equilibrium price than on quantity. The steepness of the inelastic supply curve results in a substantial price change but a relatively small change in quantity as demand shifts.