key term - Perfectly Elastic Supply

Definition

Perfectly elastic supply refers to a situation where the quantity supplied of a good or service changes infinitely with any change in price. This means that suppliers are willing to offer any quantity at a specific price, but if the price changes even slightly, the quantity supplied drops to zero. This concept highlights a theoretical extreme in the price elasticity of supply spectrum, where supply reacts instantaneously to price fluctuations.

5 Must Know Facts For Your Next Test

1. In a perfectly elastic supply scenario, the supply curve is represented as a horizontal line on a graph, indicating that the price remains constant regardless of the quantity supplied.
2. Perfectly elastic supply is more common in highly competitive markets or industries where products are identical and easily substituted.
3. This concept implies that producers have no control over the market price and must accept the prevailing market rate.
4. Real-world examples of perfectly elastic supply are rare; however, they can sometimes be seen in agricultural products during peak harvest times.
5. The concept serves as a benchmark for understanding how responsive supply can be and helps compare it to less elastic scenarios.

Review Questions

• How does perfectly elastic supply differ from inelastic supply in terms of producer response to price changes?
  • Perfectly elastic supply means that producers will provide any amount of a good at a specific price, but if that price changes even slightly, they will stop supplying altogether. In contrast, inelastic supply indicates that producers will continue to supply a good even when prices fluctuate, but with little change in quantity. The key difference lies in how sensitive suppliers are to price changes; perfectly elastic suppliers are extremely responsive while inelastic suppliers show minimal responsiveness.
• What implications does perfectly elastic supply have on market pricing and competition among suppliers?
  • With perfectly elastic supply, market pricing becomes very competitive because suppliers cannot influence prices. If they attempt to raise their prices above the market rate, they will lose all sales as consumers switch to competitors. This creates a scenario where all suppliers must adhere to the prevailing market price, fostering an environment of intense competition. It ensures that prices remain stable unless affected by external market forces.
• Evaluate the circumstances under which perfectly elastic supply could realistically occur in certain markets and its potential impact on overall economic equilibrium.
  • Perfectly elastic supply could realistically occur in markets characterized by homogeneous products and high competition, such as agricultural goods during peak seasons. In these cases, producers can easily adjust their output without impacting the market price. This scenario impacts overall economic equilibrium by ensuring that prices remain stable while allowing for high levels of output. However, it also highlights vulnerabilities; if demand were to decrease even slightly, producers would face significant challenges as they would have to drastically cut production or risk going out of business.

Related terms

Price Elasticity of Supply:

A measure of how much the quantity supplied of a good responds to a change in the price of that good, typically expressed as a percentage change.

Inelastic Supply: A situation where the quantity supplied changes little when there is a change in price, indicating that suppliers are less responsive to price changes.

Market Equilibrium:

The point where the quantity of goods supplied equals the quantity of goods demanded, resulting in a stable market price.