key term - Perfectly Elastic Supply

Definition

Perfectly elastic supply refers to a situation where the supply of a good or service is infinitely responsive to changes in price. In this scenario, suppliers are willing to sell any quantity of the product at the prevailing market price, and a slight increase in price would result in an infinite increase in quantity supplied.

5 Must Know Facts For Your Next Test

1. Perfectly elastic supply is an extreme case where the supply curve is a horizontal line, indicating that suppliers are willing to sell any quantity at the prevailing market price.
2. With perfectly elastic supply, a slight increase in price would result in an infinite increase in quantity supplied, as suppliers can sell as much as consumers demand at the higher price.
3. Perfectly elastic supply implies that suppliers have a limitless capacity to produce the good or service, and there are no constraints on their ability to adjust production in response to price changes.
4. The concept of perfectly elastic supply is often used as a theoretical benchmark to understand the behavior of suppliers and the dynamics of the market, although it may not accurately represent real-world scenarios.
5. Perfectly elastic supply is a key assumption in the analysis of price elasticity of supply and its implications for pricing strategies and market equilibrium.

Review Questions

• Explain how the concept of perfectly elastic supply relates to the price elasticity of supply.
  • Perfectly elastic supply is an extreme case of price elasticity of supply, where the quantity supplied is infinitely responsive to changes in price. In this scenario, the supply curve is a horizontal line, indicating that suppliers are willing to sell any quantity at the prevailing market price. This means that a slight increase in price would result in an infinite increase in quantity supplied, as suppliers can sell as much as consumers demand at the higher price. The concept of perfectly elastic supply is a key assumption in the analysis of price elasticity of supply and its implications for pricing strategies and market equilibrium.
• Describe the key characteristics of a market with perfectly elastic supply and how it differs from markets with other supply elasticities.
  • In a market with perfectly elastic supply, suppliers have a limitless capacity to produce the good or service, and there are no constraints on their ability to adjust production in response to price changes. This means that the supply curve is a horizontal line, and a slight increase in price would result in an infinite increase in quantity supplied. This is in contrast to markets with inelastic supply, where the quantity supplied is relatively unresponsive to changes in price, and markets with elastic supply, where the quantity supplied is highly responsive to price changes. The concept of perfectly elastic supply is a theoretical benchmark used to understand the behavior of suppliers and the dynamics of the market, although it may not accurately represent real-world scenarios.
• Analyze the implications of perfectly elastic supply for pricing strategies and market equilibrium, and explain how this concept is used in the context of 5.1 Price Elasticity of Demand and Price Elasticity of Supply and 5.3 Elasticity and Pricing.
  • The concept of perfectly elastic supply is a key assumption in the analysis of price elasticity of demand and price elasticity of supply, as well as in the study of elasticity and pricing. In a market with perfectly elastic supply, suppliers can sell any quantity at the prevailing market price, and a slight increase in price would result in an infinite increase in quantity supplied. This has important implications for pricing strategies, as it suggests that suppliers have limited ability to influence prices and must instead focus on maximizing the quantity sold. Additionally, in a market with perfectly elastic supply, the market equilibrium price is determined solely by the demand side, as suppliers are willing to sell any quantity at that price. This concept is used to understand the dynamics of market equilibrium and the role of supply and demand in determining prices, which is the focus of the topics 5.1 and 5.3.

Related terms

Price Elasticity of Supply:

The measure of how responsive the quantity supplied of a good or service is to a change in its price, holding all other factors constant.

Inelastic Supply:

A situation where the quantity supplied of a good or service is relatively unresponsive to changes in its price.

Elastic Supply:

A situation where the quantity supplied of a good or service is highly responsive to changes in its price.