Question

Show with the help of a diagram the effect of a change in supply on equilibrium price when the demand curve is perfectly elastic.

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 equilibrium price stays constant.
• This situation is represented in the diagram below. The perfectly elastic demand curve is shown as a horizontal line (D). The initial supply curve is SS, which intersects the demand curve at point A, determining the equilibrium price OP and quantity OQ₀. 
• If there is an increase in supply, the supply curve shifts rightward to S₁S₁, leading to an increase in equilibrium quantity to OQ₁, but the price remains at OP.
• On the other hand, a decrease in supply shifts the curve leftward to S₂S₂, reducing the equilibrium quantity to OQ₂, yet the price still stays constant at OP.

Thus, when demand is perfectly elastic, supply changes affect only quantity, not price.