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October 31, 2014 

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SHORT-RUN SUPPLY CURVE: For a perfectly competitive firm, the marginal cost curve that lies above the average variable cost curve. This segment of the marginal cost guides a perfectly competitive firm's profit maximizing production as it equates price to marginal cost. Because the marginal cost curve is positively sloped (due to the law of diminishing marginal returns), each firm's supply curve and the market supply curve are also positively sloped. The law of diminishing marginal returns thus provides an explanation for the law of supply. However, this only works for firms with NO market control. Monopoly, monopolistic competition, and oligopoly, with market control, do not achieve the same result.

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PERFECTLY ELASTIC:

An elasticity alternative in which infinitesimally small changes in one variable (usually price) cause infinitely large changes in another variable (usually quantity). Quantity is infinitely responsive to price. Any change in price, no matter how small, triggers an infinite change in quantity. This characterization of elasticity is most important for the price elasticity of demand and the price elasticity of supply. Perfectly elastic is one of five elasticity alternatives. The other four are perfectly inelastic, relatively elastic, relatively inelastic, and unit elastic.
AlternativeCoefficient (E)
Perfectly ElasticE = ∞
Relatively Elastic1 < E < ∞
Unit ElasticE = 1
Relatively Inelastic0 < E < 1
Perfectly InelasticE = 0
Perfectly elastic means an infinitesimally small change in price results in an infinitely large change in quantity demanded or supplied. This elasticity alternative exists when the price is fixed, that is, an infinite range of quantities is associated with the same price. Perfectly elastic demand can occur, in theory, when buyers have the choice among a large number of perfect substitutes in the consumption of a good. In an analogous way, perfectly elastic supply can occur when sellers have the choice among a large number of perfect substitutes in the production.

The chart to the right displays the five alternatives based on the coefficient of elasticity (E). In technical shorthand (often used by economists who have really tiny fingers), the coefficient of elasticity (E) is given as:

E = ∞

This technical shorthand works for both the price elasticity of demand and the price elasticity of supply, because the negative value of the price elasticity of demand is ignored. If the negative sign is not ignored, then the price elasticity of demand is given by E = -∞.

Two Curves

Perfectly Elastic Curves

Perfectly elastic demand and supply are best understood and more easily seen with pictures. The blank graph presented here is ready and willing to display a perfectly elastic demand curve and a perfectly elastic supply curve. All that is needed is a click of the corresponding buttons labeled "Demand" and "Supply."

Both of the curves revealed by the button-clicking are horizontal, perfectly horizontal, with absolutely no slope. They are perfectly flat. This is THE hallmark characteristic of perfectly elastic. Being perfectly horizontal means that, for a given price, buyers buy or sellers sell any quantity. The focus, in other words, of a perfectly elastic curve is on price not quantity. If the price should change by an infinitesimally small amount, then quantity explodes to an infinitely large amount or drops to zero.

How about a couple of examples to illustrate perfectly elastic demand and perfectly elastic supply? However, before providing examples, note that use of the word "perfectly" means that the perfectly elastic alternative is an ideal, theoretical extreme that does NOT actually exist in the real world. As such, the hypothetical, fabricated examples provided here are intended only to illustrate.

Demand

The key for perfectly elastic demand is that the good has a large number of very, very, very close (that is, perfect) substitutes-in-consumption readily available. One hypothetical example is paper clips produced by the Quad D company. These are standard, run-of-the-mill, nothing fancy, metal paper clips, just like those offered by hundreds of companies. A Quad D paper clip is indistinguishable from any other paper clip made by any other company.

As such, the demand for Quad D paper clips is perfectly elastic. The Quad D company sells all of the paper clips that it wants at a specific price. If Quad D lowers the price of its paper clips by an infinitesimally small amount, then an infinite number of buyers who might have bought the other paper clips buy Quad D paper clips instead. If Quad D should raise the price of its paper clips by an infinitesimally small amount, then buyers buy paper clips made by other companies. Of course, they have no reason to raise their price because they can sell all that they want at the existing price.

Supply

The key for perfectly elastic supply is that the good has a large number of very, very, very close (as in perfect) substitutes-in-production readily available. Any quantity of the good can be produced at the same production cost and price because the productive resources can be easily (as in perfectly) switched back and forth between other goods. A hypothetical example of perfectly elastic supply comes with a generic cheese sandwich, such as that sold by Manny Mustard and thousands of others. The production cost of combining labor, kitchen utensils, mayonnaise, cheese, and bread are one dollar per sandwich. This cost is the same for one sandwich or one billion sandwiches. There is no increasing opportunity cost. There are no economies of scale.

As such, the supply of generic cheese sandwiches is perfectly elastic. If buyers pay a buck each, one dollar, they get as many generic cheese sandwiches as they want. If buyers should lower the price they offer for generic cheese sandwiches by an infinitesimally small amount, then sellers do not supply any generic cheese sandwiches. If buyers should raise the price they offer for generic cheese sandwiches by an infinitesimally small amount, then sellers supply an infinitely large amount. Of course, buyers have no reason to offer a lower price because they can buy all that they want at the existing price.

<= PERFECT COMPETITION, TOTAL ANALYSISPERFECTLY INELASTIC =>


Recommended Citation:

PERFECTLY ELASTIC, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 31, 2014].


Check Out These Related Terms...

     | perfectly inelastic | relatively elastic | relatively inelastic | unit elastic | elasticity alternatives | elasticity alternatives, demand | elasticity alternatives, supply | elastic | elastic demand | elastic supply |


Or For A Little Background...

     | elasticity | coefficient of elasticity | price elasticity of demand | supply | law of demand | demand curve | price elasticity of supply | supply | law of supply | supply curve |


And For Further Study...

     | elasticity and demand slope | elasticity and supply intercept | demand elasticity and total expenditure | price elasticity of demand | income elasticity of demand | cross elasticity of demand | elasticity determinants |


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