Question

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

Short answer

When supply is elastic, shifts in demand will have a larger effect on equilibrium quantity than on price. This is due to producers' ability to adjust production levels easily in response to changes in demand, thereby mitigating the impact on price and ensuring the change is mostly absorbed through changes in the quantity supplied and demanded in the market.

Step-by-step solution

Understanding elastic supply

An elastic supply implies that producers can easily adjust the production level in response to price changes. This could be due to factors such as low production costs or high adaptability to market fluctuations.

Understanding shifts in demand

Shifts in demand occur when there is a change in the quantity of goods or services that the market is willing to buy at different prices. A shift in demand can be either an increase (shift to the right) or a decrease (shift to the left) in demand. Factors like consumer preferences, income changes, and population growth can lead to shifts in demand.

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

When the supply is elastic, producers are more responsive to changes in price. If there is an increase in demand (rightward shift), producers will easily increase production to meet the higher demand. Likewise, if there is a decrease in demand (leftward shift), producers can adjust their production downwards. Therefore, the majority of the impact will be on equilibrium quantity rather than price.

Conclusion

When supply is elastic, shifts in demand will have a larger effect on equilibrium quantity than on price. This is because producers can easily adjust the production levels in response to changes in demand, mitigating the impact on price and ensuring that the change is mostly absorbed through changes in the quantity supplied and demanded in the market.