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 price. This is because consumers are highly sensitive to price changes, and their demand for the product will change significantly when the price changes due to shifts in supply.

Step-by-step solution

Definition of Elastic Demand

Elastic demand refers to a situation where the percentage change in quantity demanded is greater than the percentage change in price when the price of a product changes. This indicates that consumers are sensitive to changes in price, and their demand for the product will change significantly when its price changes.

Understanding Shifts in Supply

Shifts in supply can occur due to various factors, such as changes in input costs, technological advancements, or other external factors affecting production. When supply shifts, it either increases or decreases, causing a movement along the demand curve, which will lead to a new equilibrium point.

Elastic Demand and Shifts in Supply

When demand is elastic, consumer sensitivity to price changes is high. As a result, any shifts in supply (increase or decrease) will have a pronounced effect on the equilibrium quantity and price.

Increase in Supply

If the supply increases, it means that producers are willing and able to supply more products at each given price level. This causes the supply curve to shift to the right. This shift will lead to a new equilibrium point where the new supply curve intersects the elastic demand curve. Since demand is elastic, the new equilibrium point will experience a relatively larger change in quantity and a smaller change in price.

Decrease in Supply

If the supply decreases, it means that producers are willing and able to supply fewer products at each given price level. This causes the supply curve to shift to the left. As with an increase in supply, the new equilibrium point will be where the new supply curve intersects the elastic demand curve. Again, since demand is elastic, the new equilibrium point will experience a relatively larger change in quantity and a smaller change in price.

Conclusion

Given that demand is elastic, shifts in supply will have a larger effect on the equilibrium quantity than on the price. This is because consumers are highly sensitive to price changes, so their demand for the product will change significantly when the price changes due to shifts in supply.