What does perfectly elastic supply mean?
Perfectly elastic supply refers to a situation in which the quantity supplied of a good or service is infinitely responsive to changes in price. In other words, when the price of a product increases, the quantity supplied increases by an infinite amount, and when the price decreases, the quantity supplied decreases by an infinite amount. This concept is crucial in understanding market dynamics and the behavior of suppliers in various economic scenarios.
In a perfectly elastic supply scenario, the supply curve is horizontal, indicating that the quantity supplied can be increased or decreased without any change in price. This is often observed in markets where there are numerous suppliers and the product can be easily substituted with alternatives. A classic example of a perfectly elastic supply is the market for agricultural products, where producers can easily adjust their output in response to price changes.
The key characteristics of perfectly elastic supply are as follows:
1. Infinite responsiveness to price changes: As mentioned earlier, the quantity supplied can change infinitely in response to price changes. This implies that suppliers are willing to produce any quantity of the product at the given price.
2. Horizontal supply curve: The supply curve is perfectly horizontal, indicating that the quantity supplied is not affected by price changes. This is because suppliers can easily adjust their production levels without any additional costs.
3. Large number of suppliers: In a perfectly elastic supply market, there are numerous suppliers who can enter or exit the market with ease. This ensures that the market is competitive and that prices remain stable.
4. No price discrimination: Since the supply curve is horizontal, suppliers cannot charge different prices for different quantities of the product. This means that consumers will pay the same price for any quantity they purchase.
The implications of perfectly elastic supply on market equilibrium are significant. In such a market, the equilibrium price is determined solely by the demand curve, as suppliers are willing to produce any quantity at the equilibrium price. This leads to a situation where the market is always in equilibrium, as any deviation from the equilibrium price would result in an infinite quantity supplied, driving the price back to the equilibrium level.
In conclusion, perfectly elastic supply is a concept that describes a market situation where the quantity supplied is infinitely responsive to price changes. This concept is crucial in understanding market dynamics and the behavior of suppliers in various economic scenarios. It is characterized by a horizontal supply curve, infinite responsiveness to price changes, a large number of suppliers, and no price discrimination.
