Inelastic Supply

Definition

Inelastic supply refers to a situation where the quantity supplied of a good or service is relatively unresponsive to changes in its price. Producers are unable or unwilling to significantly adjust the amount they are willing to sell, even if the price rises or falls.

5 Must Know Facts For Your Next Test

1. Inelastic supply is characterized by a price elasticity of supply less than 1, indicating that the percentage change in quantity supplied is less than the percentage change in price.
2. Factors that contribute to inelastic supply include limited production capacity, long production lead times, and the inability to quickly adjust input quantities.
3. Inelastic supply can lead to significant price fluctuations, as small changes in demand can result in large changes in the equilibrium price.
4. In the context of the market system as an efficient mechanism for information, inelastic supply signals that producers are unable or unwilling to respond to price signals in the short run.
5. Inelastic supply is one of the polar cases of elasticity, along with perfectly elastic supply, and is a key concept in understanding the relationship between price and quantity supplied.

Review Questions

• Explain how inelastic supply relates to the market system's ability to efficiently allocate resources.
  • When supply is inelastic, the market system's ability to efficiently allocate resources is compromised. Producers are unable or unwilling to quickly adjust the quantity supplied in response to price signals, meaning the market cannot efficiently clear and reach a new equilibrium. This can lead to significant price fluctuations and suboptimal allocation of resources, as the market system cannot effectively coordinate supply and demand.
• Describe how the concept of inelastic supply is connected to the price elasticity of supply and the polar cases of elasticity.
  • Inelastic supply is directly related to the price elasticity of supply, which measures the responsiveness of quantity supplied to changes in price. When supply is inelastic, the price elasticity of supply is less than 1, indicating that the percentage change in quantity supplied is less than the percentage change in price. Inelastic supply is one of the polar cases of elasticity, along with perfectly elastic supply, where the price elasticity of supply is 0 and the quantity supplied does not change at all in response to price changes.
• Analyze how inelastic supply can impact the equilibrium price and quantity in a market, and discuss the implications for producers and consumers.
  • In a market with inelastic supply, small changes in demand can result in large changes in the equilibrium price. This is because producers are unable or unwilling to significantly adjust the quantity supplied, even if the price rises or falls. As a result, the burden of adjusting to changes in demand falls primarily on the price, leading to greater price volatility. For producers, inelastic supply means they have limited ability to influence the market price, while consumers face greater uncertainty and potential price shocks. This can have significant implications for the efficient allocation of resources and the overall functioning of the market system.

Related terms

Price Elasticity of Supply: The measure of how responsive the quantity supplied is to a change in the good's price, calculated as the percentage change in quantity supplied divided by the percentage change in price.

Perfectly Inelastic Supply: A situation where the quantity supplied does not change at all in response to price changes, resulting in a price elasticity of supply equal to 0.

Constant Elasticity of Supply: A supply curve that maintains the same price elasticity of supply along its entire length, regardless of the price level.