Which of the following cases will result in the largest...

Which of the following cases will result in the largest decrease in equilibrium price? The largest change in equilibrium quantity? Verify your answers by drawing graphs. a. Demand is highly inelastic; there is a relatively large increase in supply. b. Demand is highly elastic; there is a relatively small increase in supply. c. Supply is highly inelastic; there is a relatively small decrease in demand. d. Supply is highly elastic and demand is very inelastic; there is a relatively large increase in supply.

Which of the following cases will result in the largest decrease in equilibrium price? The largest change in
equilibrium quantity? Verify your answers by drawing graphs.
a. Demand is highly inelastic; there is a relatively large increase in supply.
b. Demand is highly elastic; there is a relatively small increase in supply.
c. Supply is highly inelastic; there is a relatively small decrease in demand.
d. Supply is highly elastic and demand is very inelastic; there is a relatively large increase in supply.

Key Concepts

Market Equilibrium

Market equilibrium is the point where the quantity demanded equals the quantity supplied. At this intersection, the price and quantity in the market are determined. Changes to either the supply or demand curves shift the equilibrium, and the size of these shifts, along with the responsiveness of buyers and sellers, determines how much the equilibrium price and quantity adjust.

Demand Elasticity

Demand elasticity measures how sensitive the quantity demanded is to a change in price. When demand is highly elastic, consumers are very responsive—small price changes lead to large changes in quantity demanded. Conversely, when demand is highly inelastic, even large price changes cause only small changes in quantity demanded, meaning that adjustments in equilibrium price tend to be more pronounced relative to changes in quantity.

Supply Elasticity

Supply elasticity gauges how responsive the quantity supplied is to a change in price. With highly elastic supply, producers can readily adjust the quantity they offer in response to price changes, often absorbing shifts with large changes in quantity rather than price. In contrast, with inelastic supply, quantity supplied changes little as the price shifts, which implies that any change in market conditions will generally force a relatively larger change in the equilibrium price.

Comparative Statics in Supply and Demand

Comparative statics is the analysis used to compare different market equilibria following changes (or 'shifts') in the demand or supply curves. By assessing the relative elasticities of demand and supply and the magnitude of the shift, one can predict whether the equilibrium price or quantity (or both) will change more significantly. For example, when supply increases and demand is very inelastic, the burden of adjustment falls mostly on the price, leading to a larger price change; when demand is very elastic, even a small shift in supply can result in a large change in equilibrium quantity.

Graphical Analysis

Graphical analysis in the context of supply and demand involves drawing the supply and demand curves to visualize their intersection (the equilibrium) and how shifts in these curves alter the equilibrium. It is a valuable tool for verifying theoretical predictions about the relative changes in equilibrium price and quantity, as the steepness (or flatness) of the curves directly reflects elasticity and helps illustrate the incidence of any shifts in the market.

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