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Inelastic supply

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Business Microeconomics

Definition

Inelastic supply refers to a situation where the quantity supplied of a good or service is relatively unresponsive to changes in price. This means that even if prices increase or decrease significantly, the amount of goods that producers are willing or able to sell does not change much. This characteristic often occurs in markets where production is constrained by factors such as time, resources, or existing commitments.

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5 Must Know Facts For Your Next Test

  1. Inelastic supply typically occurs in industries where production requires a significant amount of time, such as agriculture or construction, meaning that producers cannot quickly adjust their output.
  2. When supply is inelastic, an increase in demand can lead to higher prices without a substantial increase in the quantity supplied.
  3. Goods with inelastic supply are often essential items, such as food and medical supplies, where producers can't easily increase production in response to price changes.
  4. The degree of inelasticity is measured using the price elasticity of supply coefficient, which is less than one for inelastic goods.
  5. Understanding inelastic supply is crucial for businesses and policymakers when making decisions about pricing and resource allocation during periods of demand fluctuations.

Review Questions

  • How does inelastic supply impact pricing strategies for businesses when demand increases?
    • When demand increases and supply is inelastic, businesses can raise prices without significantly increasing the quantity they produce. This allows them to capitalize on higher demand while maintaining profit margins. In such situations, consumers may have limited alternatives, making them more willing to accept higher prices for essential goods.
  • Discuss the relationship between inelastic supply and the short-run production capabilities of firms.
    • Inelastic supply is closely linked to short-run production capabilities because firms often face limitations in how quickly they can adjust output. Factors like fixed resources and time constraints mean that producers cannot rapidly increase production even if prices rise significantly. This results in a steep supply curve, indicating that quantity supplied does not change much despite price fluctuations.
  • Evaluate the implications of inelastic supply on market equilibrium during economic crises.
    • During economic crises, the implications of inelastic supply become evident as the inability to adjust production leads to significant price increases for essential goods. When demand spikes due to a crisis and supply remains stagnant, it creates shortages and drives prices up further. This situation can exacerbate the economic impact on consumers who rely on these goods, leading to increased inequality and heightened scrutiny of pricing practices by regulators.
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