Answer to Question #206944 in Microeconomics for Zeeyah

Question

What does it mean when we say that supply is perfectly inelastic?

Answer 1

SUPPLY INELASTICITY

Normally change in prices should be directly correlated to changes in supply but the following instances may lead to supply inelasticity:-

• If a firm or a company have limited capacity or operating to near full capacity then it will be near to impossibility that change in price will be lower than change in supply as the firm has no technical capacity to increase units produced.
• Inadequate raw materials will also have supply as there is no means of increasing production. Despite increased demand the supply will be inelastic as its impossible to increase supply.
• Government regulations or province planning restrictions may cause supply inelastic as there will be restricted or expected units of supply per given period irrespective of the shifts in prices.
• Short term default situations normally affects how much is produced for consumption. investable capital is always fixed at those stages and acquisition of adequate factors of production is very difficult to acquire.
• Inadequate factors of production is also another factor that may limit the supply despite significant shift in price. If there is no chance to acquire skilled labor force or raw materials then supply will be inelastic with no control over it.
• Also if the goods in question are meant for survival purposes then there is no possibility that it will be affected by shifts in prices thus supply will be inelastic.