Question

One market has an elastic demand for the good. In a second market, the demand is inelastic. Everything else is the same in the two markets. An increase in supply, will ______________ the equilibrium quantity the most in the ______________ market.

Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.
a)increase; first
b)decrease; first
c)increase; second
d)decrease; second
e)increase; we cannot tell in which market the change will be the greatest, it depends upon the elasticity of supply

Answer 1

In the market with elastic demand, an increase in supply will increase the equilibrium quantity the most. In the market with inelastic demand, the increase in supply will also increase the equilibrium quantity, but the change will be smaller compared to the market with elastic demand.(option a)

Step-by-step explanation:

In the market with an elastic demand, an increase in supply will increase the equilibrium quantity the most. This is because when demand is elastic, a change in price will have a larger effect on the quantity demanded. So, when the supply increases, it leads to a greater decrease in price, resulting in a larger increase in quantity demanded.

In the market with an inelastic demand, an increase in supply will also increase the equilibrium quantity, but the change will be smaller compared to the market with elastic demand. This is because when demand is inelastic, a change in price will have a smaller effect on the quantity demanded. So, even with an increase in supply, the change in price will be relatively smaller, resulting in a smaller increase in quantity demanded.

Example: Let's say both markets start with an equilibrium price of $5 and equilibrium quantity of 100 units. In the market with elastic demand, an increase in supply may lead to a decrease in price to $4, resulting in an increase in quantity demanded to 120 units. In the market with inelastic demand, the increase in supply may only decrease the price to $4.80, resulting in a smaller increase in quantity demanded to 110 units.