A decrease in supply will cause the largest increase in price when
A)both supply and demand are inelastic.
B)both supply and demand are elastic.
C)demand is elastic and supply is inelastic.
D)demand is inelastic and supply is elastic.

Question

Quizplus · Accepted Answer

When both supply and demand are inelastic, a decrease in supply will not be met with a significant change in quantity demanded, leading to a larger increase in price compared to other scenarios. Elasticity measures how much the quantity demanded or supplied responds to changes in price. Inelastic demand or supply means that the quantity demanded or supplied changes very little with price changes. Therefore, if supply decreases and neither consumers nor producers are responsive to price changes (inelastic), the price has to increase significantly to reach a new equilibrium.

A Decrease in Supply Will Cause the Largest Increase in Price