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💵principles of macroeconomics review

key term - Perfectly Inelastic Supply

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Definition

Perfectly inelastic supply refers to a situation where the quantity supplied of a good or service remains constant regardless of changes in its price. In this scenario, the supply curve is vertical, indicating that the quantity supplied does not respond to price fluctuations.

5 Must Know Facts For Your Next Test

  1. Perfectly inelastic supply means that the quantity supplied does not change at all in response to price changes.
  2. This scenario is represented by a vertical supply curve, indicating that the quantity supplied is fixed regardless of the price.
  3. Perfectly inelastic supply is an extreme case of inelastic supply, where the price elasticity of supply is equal to zero.
  4. Factors that can contribute to perfectly inelastic supply include limited production capacity, government regulations, or the unique nature of the good or service.
  5. The concept of perfectly inelastic supply is crucial in understanding how changes in demand can affect the equilibrium price and quantity in a market.

Review Questions

  • Explain how the concept of perfectly inelastic supply relates to the price elasticity of supply.
    • Perfectly inelastic supply is a special case of inelastic supply, where the price elasticity of supply is equal to zero. This means that the quantity supplied does not respond at all to changes in price. The supply curve for a perfectly inelastic good is represented by a vertical line, indicating that the quantity supplied remains constant regardless of the price. Understanding the concept of perfectly inelastic supply is crucial in analyzing how changes in demand can affect the equilibrium price and quantity in a market.
  • Describe the factors that can contribute to a situation of perfectly inelastic supply.
    • There are several factors that can lead to a scenario of perfectly inelastic supply. These include limited production capacity, where the supplier is unable to increase or decrease the quantity supplied in response to price changes. Government regulations, such as quotas or production limits, can also result in perfectly inelastic supply. Additionally, the unique nature of the good or service, such as rare or irreplaceable resources, can make the supply perfectly inelastic, as the quantity available cannot be altered regardless of the price.
  • Analyze the implications of perfectly inelastic supply on the equilibrium price and quantity in a market.
    • In a market with perfectly inelastic supply, changes in demand will have a significant impact on the equilibrium price, but not on the equilibrium quantity. Since the quantity supplied remains fixed regardless of price, any shift in demand will be reflected entirely in the price. For example, if demand increases, the price will rise dramatically to clear the market, but the quantity traded will not change. Conversely, a decrease in demand will lead to a substantial drop in the equilibrium price, but the quantity supplied will remain unchanged. This highlights the importance of understanding the concept of perfectly inelastic supply in analyzing market equilibrium.

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