Perfectly Elastic

Definition

Perfectly elastic refers to a situation where the quantity demanded or supplied of a good or service changes infinitely in response to even the smallest change in price. This concept is particularly relevant in the context of Elasticity in Areas Other Than Price, as it highlights the sensitivity of various economic variables to changes in factors beyond just price.

5 Must Know Facts For Your Next Test

1. Perfectly elastic demand or supply means that even the smallest change in price will result in an infinite change in quantity demanded or supplied.
2. Perfectly elastic demand or supply is an extreme case that is rarely observed in the real world, but it serves as a useful theoretical benchmark.
3. Perfectly elastic demand or supply is often associated with highly competitive markets where individual producers or consumers have no influence on the market price.
4. The concept of perfect elasticity is important in understanding the impact of government policies, such as taxes or subsidies, on market outcomes.
5. Perfectly elastic demand or supply is a key assumption in many economic models and theories, such as the theory of perfect competition.

Review Questions

• Explain the concept of perfectly elastic demand or supply and its implications for market equilibrium.
  • Perfectly elastic demand or supply means that even the smallest change in price will result in an infinite change in quantity demanded or supplied. This implies that producers or consumers in a perfectly elastic market have no influence over the market price, as they must accept the prevailing price. In a perfectly elastic market, any change in demand or supply will be fully reflected in the quantity traded, rather than in the price. This has important implications for the analysis of market equilibrium and the effects of government policies, such as taxes or subsidies, on market outcomes.
• Describe the characteristics of markets that are likely to exhibit perfectly elastic demand or supply.
  • Markets that are highly competitive, with a large number of producers or consumers, are more likely to exhibit perfectly elastic demand or supply. In such markets, individual producers or consumers have no influence over the market price, and they must accept the prevailing price. Additionally, markets with homogeneous products, where there are no significant differences between the goods or services offered by different producers or demanded by different consumers, are also more likely to exhibit perfect elasticity. Finally, markets with low barriers to entry and exit, where new producers can easily enter or existing producers can easily exit, are also more likely to exhibit perfectly elastic demand or supply.
• Analyze the implications of perfectly elastic demand or supply for the effectiveness of government policies, such as taxes or subsidies, in influencing market outcomes.
  • In a market with perfectly elastic demand or supply, government policies, such as taxes or subsidies, will have a significant impact on the quantity traded, but little to no impact on the market price. For example, in a market with perfectly elastic supply, the imposition of a tax will result in a decrease in the quantity supplied, but the price paid by consumers will remain unchanged. Similarly, in a market with perfectly elastic demand, a subsidy will increase the quantity demanded, but the price received by producers will remain unchanged. This has important implications for the effectiveness of government policies in achieving desired market outcomes, as the incidence of the policy (i.e., the distribution of the burden or benefit) will be borne entirely by the side of the market that is not perfectly elastic.

Related terms

Elasticity:

Elasticity measures the responsiveness of one economic variable to changes in another, such as the responsiveness of quantity demanded to changes in price.

Demand Elasticity: Demand elasticity refers to the responsiveness of quantity demanded to changes in price, income, or other factors that influence demand.

Supply Elasticity: Supply elasticity refers to the responsiveness of quantity supplied to changes in price or other factors that influence supply.