If demand is price elastic, then an increase in supply will cause which one of the following?
Answer A- D
A. A relatively large decrease in quantity demanded.
B. A relatively small increase in quantity demanded.
C. A relatively small decrease in quantity demanded.
D. A relatively large increase in quantity demanded.
The correct answer and explanation is:
The correct answer is D. A relatively large increase in quantity demanded.
Explanation:
When demand is price elastic, it means that the quantity demanded of a good or service is highly responsive to changes in price. This elasticity occurs when consumers are sensitive to price changes, meaning that if the price of the good decreases, the quantity demanded increases significantly. The elasticity of demand is greater than 1, indicating a proportionally larger change in quantity demanded compared to the change in price.
Now, if supply increases, the market supply curve shifts to the right. This shift leads to a lower equilibrium price because there is now more of the good or service available in the market. When this happens in a market where demand is price elastic, the reduction in price causes a relatively large increase in quantity demanded. Since the consumers are highly responsive to price changes, even a small decrease in price can lead to a significant increase in the quantity demanded.
For example, if the price of a product like a smartphone drops due to an increase in supply (more units being produced or imported), consumers will likely purchase more of the smartphones because they are sensitive to the price reduction. The larger the price decrease, the more significant the increase in the quantity demanded.
In contrast, if the demand were inelastic (less responsive to price changes), a price reduction would result in a much smaller increase in quantity demanded. Therefore, in markets with elastic demand, an increase in supply leads to a relatively large increase in quantity demanded because of the high responsiveness to price changes.