Economics – The allocation of resources - Price elasticity of supply (PES) | e-Consult

Answer: A perfectly elastic supply curve is a horizontal line. This means that producers are willing and able to supply any quantity at a specific price, but they will not supply anything at a price below that level.

Firm's Pricing Decisions: A firm with perfectly elastic supply is a price taker. It must accept the prevailing market price. If the price is higher than the market price, the firm will supply an infinite quantity. If the price is lower, the firm will supply nothing.

Market Equilibrium: In a market with perfectly elastic supply, the supply curve coincides with the demand curve at the equilibrium price and quantity. This is because at the equilibrium price, producers are willing to supply the entire quantity demanded. Any deviation from this price will result in either surplus or shortage, which will quickly be corrected by the market mechanism.

Factors leading to perfectly elastic supply:

• Large number of suppliers: If there are many producers, each individual producer's output has a negligible impact on the overall market supply.
• Homogeneous products: The products supplied by different producers are essentially identical, making it difficult for any one producer to influence the market price.
• No capacity constraints: Producers have unlimited capacity to increase output without incurring additional costs.