What happens to equilibrium price and quantity when supply increases and demand is perfectly inelastic?

Let us now discuss the effect on equilibrium price and equilibrium quantity in the following four special cases:

(I) Change in Demand when Supply is Perfectly Elastic

(II) Change in Supply when Demand is Perfectly Elastic

(III) Change in Demand when Supply is Perfectly Inelastic

(IV) Change in Supply when Demand is Perfectly Inelastic

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(I) Change in Demand when Supply is Perfectly Elastic:

When supply is perfectly elastic, then change in demand does not affect the equilibrium price of the commodity. It only changes the equilibrium quantity. Original Equilibrium is determined at point E, when the original demand curve DD and the perfectly elastic supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The change may be either an ‘Increase in Demand’ or ‘Decrease in Demand’.

(a) Increase in Demand:

When demand increases, the demand curve shifts to the right from DD to D1D1 (Fig. 11.22). Supply curve SS is a horizontal straight line parallel to the X-axis. Due to increase in demand for the product, the new equilibrium is established at E1. Equilibrium quantity rises from OQ to OQ1 but equilibrium price remains same at OP as supply is perfectly elastic.

(b) Decrease in Demand:

When demand decreases, the demand curve shifts to the left from DD to D2D2 (Fig. 11.23). Supply curve SS is a horizontal straight line parallel to the X-axis. Due to decrease in demand, the new equilibrium is established at E2. Equilibrium quantity falls from OQ to OQ2 but equilibrium price remains the same at OP as supply is perfectly elastic.

(II) Change in Supply when Demand is Perfectly Elastic:

When demand is perfectly elastic, then change in supply does not affect the equilibrium price of the commodity. It only changes the equilibrium quantity. Original Equilibrium is determined at point E, when the perfectly elastic demand curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The change may be either an ‘Increase in Supply’ or ‘Decrease in Supply’.

(a) Increase in Supply:

When supply increases, the supply curve shifts to the right from SS to S1S1 (Fig. 11.24). Demand curve DD is a horizontal straight line parallel to the X-axis. Due to increase in supply for the product, the new equilibrium is established at E1. Equilibrium quantity rises from OQ to OQ1 but equilibrium price remains the same at OP as demand is perfectly elastic.

(b) Decrease in Supply:

When supply decreases, the supply curve shifts to the left from SS to S2S2 (Fig. 11.25). Demand curve DD is a horizontal straight line parallel to the X-axis. Due to decrease in supply for the product, the new equilibrium is established at E2. Equilibrium quantity falls from OQ to OQ2 but equilibrium price remains same at OP due to perfectly elastic demand.

(III) Change in Demand when Supply is perfectly Inelastic:

When supply is perfectly inelastic, then change in demand does not affect the equilibrium quantity. It only changes the equilibrium price. The change may be either an ‘Increase in Demand’ or ‘Decrease in Demand’.

(a) Increase in Demand:

When demand increases, the demand curve shifts to the right from DD to D1D1 (Fig. 11.26). Supply curve SS is a vertical straight line parallel to the Y-axis. Due to increase in demand for the product, the new equilibrium is established at E1. Equi­librium price rises from OP to OP2 but equilibrium quantity remains the same at OQ as supply is per­fectly inelastic.

(b) Decrease in Demand:

When demand de­creases, the demand curve shifts to the left from DD to D2D2 (Fig. 11.27). Supply curve SS is a vertical straight line parallel to the Y-axis. Due to decrease in demand, the new equilibrium is established at E2. Equilib­rium price falls from OP to OP2 but equilibrium quan­tity remains the same at OQ as the supply is perfectly inelastic.

(IV) Change in Supply when Demand is perfectly inelastic:

When demand is perfectly inelastic, then change in supply does not affect the equilibrium quantity. It only changes the equilibrium price. The change may be either an ‘Increase in Supply’ or ‘Decrease in Supply’.

(a) Increase in Supply:

When supply increases, the supply curve shifts to the right from SS to S^ (Fig. 11.28). Demand curve DD is a vertical straight line parallel to the Y-axis. Due to increase in supply for the product, the new equilibrium is established at point E1. Equilibrium price falls from OP to OP1 but equilibrium quan­tity remains the same at OQ as demand is perfectly inelastic.

(b) Decrease in Supply:

When supply decreases, the supply curve shifts to the left from SS to S2S2 (Fig. 11.29). Demand curve DD is a vertical straight line parallel to the Y-axis. Due to decrease in supply for the product, the new equilibrium is established at point E2. Equilibrium price rises from OP to OP2 but equilibrium quantity remains the same at OQ as demand is perfectly inelastic.