Perfectly elastic demand/supply

Definition

Perfectly elastic demand/supply refers to a situation where the quantity demanded or supplied changes infinitely with any change in price. This concept highlights a market where consumers or producers are extremely responsive to price changes, making the demand or supply curve horizontal. In such cases, even the slightest increase in price can lead to a complete drop in quantity demanded, while a decrease in price can cause an infinite increase in quantity demanded, indicating extreme sensitivity to price fluctuations.

5 Must Know Facts For Your Next Test

1. In perfectly elastic demand, consumers will only buy at one specific price; any higher price leads to zero demand.
2. Perfectly elastic supply indicates that producers are willing to supply any quantity at a given price but will not supply anything if the price falls below that level.
3. Goods that are perfectly elastic often have many substitutes available, making consumers highly responsive to price changes.
4. Perfectly elastic demand is usually theoretical and rarely observed in real markets, but it can apply to certain commodities traded on stock exchanges.
5. The concept is important for understanding extreme market scenarios and helps illustrate the limits of demand and supply responses.

Review Questions

• How does perfectly elastic demand impact consumer behavior when prices change?
  • When demand is perfectly elastic, consumer behavior is significantly influenced by any price changes. Consumers are willing to purchase an infinite quantity of a good at a specific price but will completely stop purchasing if the price increases even slightly. This means that sellers must be very careful about their pricing strategies, as even small increases can result in total loss of sales, demonstrating extreme sensitivity to price fluctuations.
• Discuss the implications of perfectly elastic supply for producers in competitive markets.
  • In a market with perfectly elastic supply, producers are ready to supply any amount of goods at a given price. However, if prices drop even slightly below this level, they would cease production entirely. This situation typically occurs in highly competitive markets where numerous suppliers exist. Producers must maintain their prices at or above the equilibrium level to avoid losing all their sales, making it crucial for them to closely monitor market conditions and pricing strategies.
• Evaluate how perfectly elastic demand and supply could influence market equilibrium and overall economic efficiency.
  • Perfectly elastic demand and supply can create unique situations regarding market equilibrium. When demand or supply is perfectly elastic, any shifts due to external factors can lead to significant changes in market dynamics. For instance, if demand increases slightly but supply remains perfectly elastic, suppliers will flood the market at current prices without changing them, leading to an efficient allocation of resources. Conversely, if prices are not appropriately set within these conditions, it could lead to inefficiencies such as wasted resources or unmet consumer needs, illustrating the delicate balance required in such markets.

Related terms

Price Elasticity of Demand:

The measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity of Supply:

The measure of how much the quantity supplied of a good responds to a change in its price, expressed as the percentage change in quantity supplied divided by the percentage change in price.

Perfectly Inelastic Demand/Supply: A scenario where the quantity demanded or supplied does not change regardless of price changes, represented by a vertical demand or supply curve.