Suppose that a market with an inelastic demand curve experiences an upward shift
ID: 1143438 • Letter: S
Question
Suppose that a market with an inelastic demand curve experiences an upward shift in the supply curve. Using comparative statics, analyze how the equilibrium price and equilibrium quantity in this market will change as a result of an upward shift in the supply curve. What is the magnitude of the change in the equilibrium price and equilibrium quantity?
Suppose that a market with an inelastic demand curve experiences an upward shift in the supply curve. Using comparative statics, analyze how the equilibrium price and equilibrium quantity in this market will change as a result of an upward shift in the supply curve. What is the magnitude of the change in the equilibrium price and equilibrium quantity?Explanation / Answer
A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied.
Under the assumption of perfect competition, supply is determined by marginal cost. Firms will produce additional output while the cost of producing an extra unit of output is less than the price they would receive.
By its very nature, conceptualizing a supply curve requires the firm to be a perfect competitor, namely requires the firm to have no influence over the market price. This is true because each point on the supply curve is the answer to the question "If this firm is faced with this potential price, how much output will it be able to and willing to sell?" If a firm has market power, its decision of how much output to provide to the market influences the market price, then the firm is not "faced with" any price, and the question is meaningless.
Economists distinguish between the supply curve of an individual firm and between the market supply curve. The market supply curve is obtained by summing the quantities supplied by all suppliers at each potential price. Thus, in the graph of the supply curve, individual firms' supply curves are added horizontally to obtain the market supply curve.
Economists also distinguish the short-run market supply curve from the long-run market supply curve. In this context, two things are assumed constant by definition of the short run: the availability of one or more fixed inputs (typically physical capital), and the number of firms in the industry. In the long run, firms have a chance to adjust their holdings of physical capital, enabling them to better adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or exit the industry in response to market conditions. For both of these reasons, long-run market supply curves are flatter than their short-run counterparts.
The determinants of supply are:
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