Question

When does the equilibrium price remain unaffected by a change in supply? Show it with the help of a diagram.

Answer 1

When the demand curve is perfectly elastic, any change in supply, whether an increase or decrease, leads to a change in the equilibrium quantity, while the price stays constant. This situation is shown in the diagram where the perfectly elastic demand curve is labeled D and the initial supply curve is SS. At equilibrium point A, the price is OP and the quantity is OQ₀. If the supply increases, the supply curve shifts to S₁S₁, raising the equilibrium quantity to OQ₁. If the supply decreases, the curve shifts to S₂S₂, reducing the equilibrium quantity to OQ₂. However, in both cases, the equilibrium price remains fixed at OP.