Monday, February 14, 2011

Perfectly Inelastic Supply

In the world of economics, the forces of demand and supply play a large role in determining the way certain goods and services are priced. These forces of demand and supply act in conjunction with each other, and a change in one of the factors inadvertently affects the other one. This is where the concept of elasticity arises from, and here we will help you learn about perfectly inelastic supply.


What is Perfectly Inelastic Supply

The elasticity of supply is defined as its ability to change when the surrounding market forces change. Thus, if other forces lead to a drastic change in supply, then it is deemed more elastic, but if the supply is relatively unaffected it is known as inelastic supply. This means that no matter how significantly demand or price factors change, the amount of supply will continue to be the same.

When one studies demand and supply curves on a graph and the law of supply and demand, the demand curve goes from left to right and the supply curve goes from right to left. The X-axis denotes the quantity of a good or a service and the Y-axis denotes the price. The point at which the demand curve and the supply curve meet is known as the Point of Equilibrium, and this denotes the amount of good that can be bought for the corresponding price.

When we speak of perfectly inelastic supply, the perfectly inelastic supply curve is a straight line which is parallel to the Y-axis. This means that no matter what the price and no matter what the demand at any given moment in time, the amount of the good or service that is supplied will be exactly the same. Hence, the supply is completely inelastic and unresponsive to any changes in other factors.

Perfectly Inelastic Supply Example

Once you understand the perfectly inelastic supply definition clearly, you can understand the concept even better with the aid of an example of demand and supply analysis. If the quantity that is supplied does not change at all, then this means that the producers or sellers of the good have no choice but to produce or sell it at any price possible. This occurs in the case of goods that have a large number of substitutes available in the market. Hence, the seller is forced to sell, even if he has to undergo a loss by doing so.

The best example is to imagine a situation where a very famous deceased painter has created three masterpieces and these need to be sold. Now, since the painter is dead, there are no forces of demand or price that can change the supplied quantity. No matter how much money a buyer is willing to pay, the supply for the paintings will be fixed at 3. This is a suitable example of perfectly inelastic supply.

Another example of perfectly inelastic supply is to consider a scenario where a farmer has to sell 100 tomatoes. These tomatoes need to be sold by the end of the day or else they will become rotten and the farmer will just have to throw them away. Thus, as the day goes by, the farmer will get more and more desperate to sell the tomatoes irrespective of what price they sell for. Hence the supply at the end of the day is the same, no matter what the price and the demand will be. The same scenario can also be applied to a florist who has to sell his flowers before they wilt. You can also read about perfectly inelastic demand.

The field of economics is not a simple one, and the concept of demand and supply curves is much more complicated than this. There are a number of other factors that affect the elasticity of supply as well, and this is something that will require careful study and research. As for now, this information on perfectly inelastic supply should suffice.

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