CA Foundation · Business Economics · Theory of Demand and Supply
If the supply of a good is perfectly inelastic in the short run and demand increases, what will be the result on the market?
Price rises and quantity stays the same. With perfectly inelastic supply, the supply curve is vertical and quantity cannot change. A rightward shift of demand therefore intersects the supply curve at a higher price, so the entire adjustment occurs through price.
- APrice rises while quantity remains unchangedCorrect
- BBoth price and quantity rise
- CPrice remains unchanged and quantity rises
- DPrice falls and quantity remains unchanged
Explanation
A perfectly inelastic supply curve is vertical, so quantity supplied is fixed whatever the price. When demand shifts right, the new demand curve cuts the vertical supply curve at a higher price but the same quantity. The whole adjustment falls on price.
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