b. Assume the demand being perfectly inelastic, and supply suddenly doubles due to innovative technique of...

b. Assume the demand being perfectly inelastic, and supply suddenly doubles due to innovative technique of production. Illustrate in a well labeled graph, the changes in the equilibrium price, and quantity, and also is it advisable to do so from supplier point of view.

Expert Solution

When demand is perfectly inelastic the change in supply does not effect the equilibrium quantity. It only change the equilibrium price.

In Fig 11.28, when supply get double due to innovative technique of production, the supply curve shifts from SS to S₁S_1. Demand Curve DD is a vertical straight line parallel to Y axis. Due to increase in supply the new equilibrium is established at point E_1. Equilibrium price falls from OP to OP₁ but the equilibrium quantity remain same at OQ as demand is perfectly inelastic

Yes it is advisable to do so from supplier point of view because technological improvement reduce the cost of production and it will shift the supply curve to right causing a greater quantity is to be produced at any given price

Point to remember : Perfectly inelastic demand refer to no change in demand either there is change in price or not like in case of necessity goods either the price of salt is increase or decrease the demand of salt get remain same as people continue to demand it even at higher price

Rahul Sunny answered 2 years ago

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