Perfectly inelastic

Definition

Perfectly inelastic refers to a situation in which the quantity supplied of a good remains constant regardless of changes in price. This means that producers are unable or unwilling to change the amount they supply, even when the market price fluctuates significantly. This concept is crucial for understanding how certain goods behave in response to market conditions, especially when supply cannot be easily adjusted.

5 Must Know Facts For Your Next Test

1. Perfectly inelastic supply is represented graphically as a vertical line on a supply and demand curve, indicating that the quantity supplied does not change with price variations.
2. Goods that are often considered perfectly inelastic include essential medical supplies and unique artworks, where producers cannot easily increase production.
3. The concept of perfectly inelastic supply highlights situations where resources are fixed or production cannot be ramped up quickly to meet demand.
4. In real-world markets, perfectly inelastic supply is rare, as most goods have some degree of elasticity, but it serves as a useful theoretical benchmark.
5. Understanding perfectly inelastic supply helps explain market behaviors during crises or emergencies when essential goods are needed but cannot be increased in quantity.

Review Questions

• How does perfectly inelastic supply affect market equilibrium when there is an increase in demand?
  • When demand increases for a good with perfectly inelastic supply, the equilibrium price rises significantly while the quantity supplied remains unchanged. This creates upward pressure on prices because consumers are willing to pay more for the same quantity available. As a result, suppliers benefit from higher revenues per unit sold, even though they cannot provide any additional units.
• Evaluate the implications of perfectly inelastic supply for producers and consumers during times of crisis.
  • During times of crisis, perfectly inelastic supply can lead to severe shortages and increased prices for essential goods. Producers may face ethical dilemmas as they have limited ability to respond to heightened demand. Consumers, on the other hand, may struggle to access necessary items, driving up prices due to scarcity. This situation often leads to debates over price controls and government intervention to protect vulnerable populations.
• Analyze how understanding perfectly inelastic supply can inform policy decisions regarding essential goods during emergency situations.
  • Understanding perfectly inelastic supply is crucial for policymakers when addressing emergencies involving essential goods like food, medicine, or energy. Policymakers can use this knowledge to implement strategies such as price controls or rationing to ensure equitable distribution among consumers. Additionally, this understanding can aid in planning for future crises by recognizing which goods might require increased production capabilities or stockpiling to prevent shortages and stabilize markets during high-demand scenarios.

Related terms

Elasticity of Supply: Elasticity of Supply measures how much the quantity supplied of a good responds to changes in its price.

Unitary Elasticity: Unitary Elasticity occurs when a percentage change in price results in an equal percentage change in quantity supplied.

Price Ceiling:

A Price Ceiling is a government-imposed limit on how high a price can be charged for a good or service, which can impact supply decisions.