Question

Using diagrams, explain when equilibrium price does not change with a change in supply.

Answer 1

When the demand curve is perfectly elastic, it is a horizontal straight line, indicating that the price (P) remains constant at all levels of quantity demanded.

In the diagram:

• The original supply curve is SS, and it intersects the demand curve D at point E₀, with equilibrium price P and quantity OM₀.

• When supply increases (shift from S to S₁), the new equilibrium is at E₁, and quantity increases to OM₁, but price remains unchanged at P.

• When supply decreases (shift from S to S₂), the new equilibrium is at E₂, and quantity falls to OM₂, still with price constant at P.