Question

For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes more elastic because firms may need to invest in additional capital in order to further increase production. True or False?

Answer 1

FALSE

Step-by-step explanation:

Supply elasticity is a microeconomic concept that aims to measure supply sensitivity in the face of changes in demand. Thus, when demand increases, if supply increases, it is because it is price sensitive (elastic supply). Conversely, when demand increases and supply does not increase considerably, supply is said to be inelastic.

Some situations are limiting to increased supply. If a firm operates at its maximum capacity, in the short run supply tends to be inelastic to changes in demand. This is because to increase production, companies already operating at full capacity would need to increase their physical structure, which takes longer. Therefore, in this case, the offer becomes more inelastic.