Definition of Perfectly Elastic Supply Curve & Example
What is Perfectly Elastic Supply
By definition, perfectly elastic supply implies that any drop in the commodity price automatically causes the supply to change to zero.
Basically, this means that a good or service’s elasticity (the percentage change in quantity / the percentage change in price) equals infinity.
The supply of goods is perfectly elastic when the price does not affect the quantity supplied; however, there are constraints to how much of a good or service can be supplied. At a given price, firms would produce as much as they can sell at that price, and so adding more units will not reduce the price they can get for them.
Perfectly elastic supply is an example of pure competition because the market price is completely determined by demand and supply. The graph of a perfectly elastic supply curve is a horizontal line at a price, meaning that if the quantity supplied increases, so does the price. This means that when we increase our demand for goods, we will get more of those goods cheaper; if we want to pay more for goods, producers will increase their supplies to match any rise in demand.
Perfectly Elastic Supply Curve
It gives the supply curve the appearance of a horizontal line:
While perfectly elastic supply is impractical, the curve can be described with a little imagination. If supply is completely elastic, any change in price causes an infinite amount of change in quantity.
In practice, it isn’t easy to find products and services that are completely elastic. Can you think of any products or services with an exponentially strong change in quantity supplied due to a minuscule price change?
However, others will argue that there are cases in real life. One example is a job market with perfect competition, in which many companies are recruiting. In this case, the wage is determined by the market rather than by a single company. Each company is a wage-taker, accepting the market wage:
As you can see, the labor supply curve is completely elastic. If the wage rate of a single company increases, the supply may adjust indefinitely. If the wage rate rises about the consumer wage, a large labor force will choose to work for that one business.
If, on the other hand, the wage rate falls below the market rate, no one would choose to work with them because they will find better-paying jobs at similar companies.
The job market for fast food restaurants is a real-world example of this. According to my understanding, all fast-food restaurants employ at a minimum wage. As a result, each restaurant will face a perfectly elastic labor supply curve.
Nobody would apply for a position at a restaurant that plans to pay less than the minimum wage. If, on the other hand, it employs above the minimum wage, there would be a massive influx of people attempting to work for them, provided that the skills needed by that restaurant are the same as the skills required by other fast-food restaurants.
Perfectly Elastic Supply Curve Example
The supply of goods is perfectly elastic when the price does not affect the quantity supplied. This is because, for the producer, it doesn’t matter what price is being charged for the good.
For example, if a company produces pencils and can sell them at any price, that producer would make as many pencils as people want to buy. The supply curve is a horizontal line for this type of good, and the market quantity supplied would be the quantity demanded.
In the example of a perfectly elastic supply curve, it is assumed that the quantity produced will never change, no matter how high (or low) the price. This is why the supply curve is horizontal.
Another good example of a perfectly elastic supply curve would be a specially trained midget wrestler named Chet. He is willing to perform at any time for any price people are willing to pay.
If someone offers Chet $0.10 for one service, he will do it. If someone offers him $100.00, he will do it. If 10 people are looking to see the show and only 9 seats available, Chet will still perform.
Because the quantity supplied is perfectly elastic, the supply curve is a horizontal line at any price on the demand curve. There are no quantities supplied other than those demanded at that price on the demand curve.
In the market of pencils, there are many buyers and only one seller. Therefore, the price of pencils is set at $0.01 per pencil.
If we were to do a brief study of perfectly elastic supply curves, we would be able to give you an idea of how much good (or service) can cost without affecting its supply and vice versa.
