Question

True or false? If the consumer demand for milk rose, then, in the long run, milk-drinking consumers would be better off if the supply of milk was elastic rather than inelastic. Explain why

Answer 1

TRUE

Reason: Let us first understand what an elastic supply is. Supply is said to be elastic if it is more responsive to teh changes in price. For example: If price rises, supply also increases proportionately.

Now, as per the question, if demand of milk rises, and supply is not rigid or inelastic, then in the long run ultimately there will be an increase in the supply as well. Accordingly both demand and supply curve will shift outwards and a new equilibrium will be formed with a higher price and and higher quantity of milk.

The price will remain same if the simultaneous increase in demand and supply is equal.

If increse in demand is greater than increase in supply, the equilibrium price will be higher than before.

However, if increase in demand is lower as compared to increase in supply, the new equilibrium price will be lower than before.

Thus, if demand increases, and supply is elastic, it adjusts to the increased demand and hence supply also increases in the long run. Ultimately the consumer is better off.

On the other hand, if supply is inelastic, then when there is increase in demand, with supply remianing the same, the prices will sharply increase and consumer will be the sufferer.