A commodity with elastic demand; a 10% decrease in supply will typically result in what price change?

A commodity with elastic demand; a 10% decrease in supply will typically result in what price change?

• A. More than 10% increase
• B. Exactly 10%
• C. Less than 10% increase
• D. Cannot determine

Answer: (C)

When demand is elastic, buyers are very responsive to price changes, so quantity demanded changes a lot as price moves. If supply falls by 10%, the market must find a new equilibrium with less quantity available. Because buyers cut back substantially in response to higher prices, the price has to rise to clear the market, but that rise is dampened by the large drop in quantity demanded. In other words, the elastic demand pulls quantity down quickly, so a smaller price increase suffices to balance the reduced supply. Hence the price increase is less than the 10% drop in supply.

When demand is elastic, buyers are very responsive to price changes, so quantity demanded changes a lot as price moves. If supply falls by 10%, the market must find a new equilibrium with less quantity available. Because buyers cut back substantially in response to higher prices, the price has to rise to clear the market, but that rise is dampened by the large drop in quantity demanded. In other words, the elastic demand pulls quantity down quickly, so a smaller price increase suffices to balance the reduced supply. Hence the price increase is less than the 10% drop in supply.