Economics – Price elasticity of supply | e-Consult

Implications of Perfectly Inelastic Supply (PES = 0):

Short-Run: In the short run, a perfectly inelastic supply means that the quantity supplied remains constant regardless of the price. This implies that the firm's supply curve is a vertical line. If the price increases, the firm can sell more at the higher price, but it will not increase its output. If the price decreases, the firm will sell the same quantity. The firm will only benefit from price increases, as it can sell all it produces at the higher price.

Long-Run: In the long run, a perfectly inelastic supply is extremely rare. It would imply that the firm has no ability to adjust its production levels, even over a long period. This could be due to fixed capacity constraints, insurmountable input limitations, or other factors. The firm's profitability would be highly dependent on the prevailing market price. If the price is high, the firm can earn substantial profits. If the price is low, the firm will suffer significant losses.

Limitations in the Real World: Perfectly inelastic supply is a theoretical concept. In the real world, there are always some constraints on a firm's ability to adjust its supply. Even if a firm has fixed capacity, it might be able to find ways to increase output (e.g., by adding shifts or overtime). Furthermore, even with fixed capacity, the firm might be able to adjust its supply by using inventory or by changing its production mix. Therefore, perfectly inelastic supply is rarely observed in practice. The concept is useful for understanding extreme cases, but it is important to recognize its limitations.