Some special cases of equilibrium

We have already explained the effects of change in demand and supply on the equilibrium price and quantity when demand and supply curves are normal slope, i.e. negatively sloping demand curve and positively sloping supply curve.

Let us consider how increase and decrease in demand affect equilibrium price in two exceptional situations:

1) When supply of the commodity is perfectly elastic        

2) When supply of the commodity is perfectly inelastic

When supply of the commodity is perfectly elastic

When supply curve is perfectly elastic i.e. supply curve is parallel to X axis, increase or decrease in demand  for a commodity does not cause any change in its price, equilibrium quantity tends to change. 

This is shown in the graph below:

perfectly elastic

E is the initial point of equilibrium when perfectly elastic supply curve(SS) intersect demand curve (DD). OP is the equilibrium price and OQ is the equilibrium quantity.

Forward shift in demand curve from DD to D₁D₁ leaves price of the commodity unchanged at OP. Equilibrium quantity increases from OQ to OQ₁.Equilibrium point shifts to E₁.

Backward shift in demand curve from DD to D₂D₂ leaves price of the commodity unchanged at OP. Equilibrium quantity decreases from OQ to OQ₂. Equilibrium point shifts to E₂.

When supply of the commodity is perfectly inelastic        

When supply curve is perfectly inelastic i.e. supply curve is parallel to Y axis, increase or decrease in demand for a commodity causes a change in price, equilibrium quantity remains constant.

This is shown in the graph below:

perfectly inelastic

E is the initial point of equilibrium when perfectly inelastic supply curve (SS) intersect demand curve (DD). OP is the equilibrium price and OQ is the equilibrium quantity.

Forward shift in demand curve from DD to D₁D₁ leaves quantity of the commodity unchanged at OQ. Equilibrium price increases from OP to OP₁.Equilibrium point shifts to E₁.

Backward shift in demand curve from DD to D₂D₂ leaves quantity of the commodity unchanged at OQ. Equilibrium price decreases from OP to OP₂. Equilibrium point shifts to E₂.

Let us now consider how increase and decrease in supply affect equilibrium price in two exceptional situations:

1) When demand for the commodity is perfectly elastic
2) When demand for the commodity is perfectly inelastic

When demand for the commodity is perfectly elastic

When demand curve is perfectly elastic i.e. demand curve is parallel to X axis, increase or decrease in supply for a commodity does not cause any change in its price, and equilibrium quantity tends to change.

This is shown in the graph below:

equilibrium

E is the initial point of equilibrium when perfectly elastic demand curve (DD) intersect supply curve (SS). OP is the equilibrium price and OQ is the equilibrium quantity.

Forward shift in supply curve from SS to S₁S₁ leaves price of the commodity unchanged at OP. Equilibrium quantity increases from OQ to OQ₁.Equilibrium point shifts to E₁.

Backward shift in supply curve from SS to S₂S₂ leaves price of the commodity unchanged at OP. Equilibrium quantity decreases from OQ to OQ₂. Equilibrium point shifts to E₂.

When demand for the commodity is perfectly inelastic

When demand curve is perfectly inelastic i.e. demand curve is parallel to Y axis, increase or decrease in supply for a commodity causes a change in price, equilibrium quantity remains constant.

This is shown in the graph below:

equilibrium

E is the initial point of equilibrium when perfectly inelastic demand curve (DD) intersect supply curve (SS). OP is the equilibrium price and OQ is the equilibrium quantity.

Forward shift in supply curve from SS to S₁S₁ leaves quantity of the commodity unchanged at OQ. Equilibrium price decreases from OP to OP₁.Equilibrium point shifts to E₁.

Backward shift in supply curve from SS to S₂S₂ leaves quantity of the commodity unchanged at OQ. Equilibrium price increases from OP to OP₂. Equilibrium point shifts to E₂.