Under normal downward sloping demand curve and fully elastic supply curve of a commodity, an exogenous decrease in demand would lead to
- (a)increase in equilibrium price and quantity
- (b)decrease in equilibrium price and quantity
- (c)decrease in equilibrium quantity and no change in price
- (d)increase in equilibrium price and no change in quantity
Correct — C, decrease in equilibrium quantity and no change in price. A fully elastic supply curve is a horizontal line: sellers are willing to supply any quantity at one particular price and nothing at all below it. An exogenous decrease in demand — a fall caused by something other than the good's own price, such as a drop in income or a change in taste — shifts the whole demand curve to the left. Since the supply curve is flat, the new intersection lies on the same horizontal line at a smaller quantity. Price is pinned by the supply side and does not move; only quantity falls. The general rule behind this is that the more elastic the supply, the more of a demand shift shows up as a change in quantity and the less as a change in price. Perfect elasticity is the limiting case where all of the adjustment falls on quantity.
- (a)increase in equilibrium price and quantity — That is what an increase in demand does when supply slopes upwards. Here demand falls, so quantity cannot rise, and with flat supply price cannot rise either.
- (b)decrease in equilibrium price and quantity — This is the answer for an ordinary upward-sloping supply curve, and it is the most tempting option for that reason. It ignores the words 'fully elastic', which is precisely the condition that stops the price from moving.
- (d)increase in equilibrium price and no change in quantity — Gets the constancy on the wrong variable. Quantity constant with price moving is what happens when supply is perfectly inelastic — a vertical supply curve — which is the mirror image of the case given here.
Equilibrium sits where the demand and supply curves cross. A change in the good's own price moves you along a curve; a change in anything else — income, tastes, the price of a related good, the number of buyers — shifts the whole curve, and that is what 'exogenous' signals here. How a shift in demand divides itself between price and quantity depends entirely on the slope of the supply curve. Flat supply means all quantity and no price; vertical supply means all price and no quantity; anything in between splits the adjustment.
The examiner has built the question so that a student who reads only 'decrease in demand' will pick option (b) out of habit. The decisive words are 'fully elastic supply curve', and the safest thing to do is draw it. Sketch a horizontal supply line and a downward-sloping demand curve, then slide the demand curve left and read off the two coordinates of the new crossing point: the height is unchanged, the width has shrunk. Perfectly elastic supply is not merely a textbook curiosity — it is the standard way of representing a small open economy that can buy or sell any quantity at the world price, or a competitive industry with constant costs and free entry. Remember the mirror case as well, because CDS is as likely to ask it: with perfectly inelastic supply, a fall in demand leaves quantity untouched and pushes the price down.
- A perfectly elastic supply curve is horizontal — any quantity is supplied at one price and none below it.
- An exogenous change in demand shifts the demand curve; a change in the good's own price moves along it.
- With flat supply, a demand shift changes quantity only and leaves price unchanged.
- With perfectly inelastic, that is vertical, supply, a demand shift changes price only and leaves quantity unchanged.
- The more elastic the supply, the larger the quantity response and the smaller the price response to a given demand shift.
Three shapes of supply, three different answers to the same shift in demand.
- Answering from the standard picture and choosing 'both price and quantity fall' without using the words 'fully elastic'.
- Confusing perfectly elastic supply, which is horizontal, with perfectly inelastic supply, which is vertical.
- Reading an exogenous fall in demand as a movement along the demand curve rather than a shift of it.
Asked as a comparative-statics item where one qualifying phrase in the stem changes the answer from the textbook default.
CDS_GK_2021_II_Q472021Which one of the following may lead to movement along the demand curve of a commodity?
- (a) Change in its price
- (b) Change in price of the other commodities
- (c) Change in income of the consumer
- (d) Change in tastes and preferences of consumers
Answer(a) Change in its price
Fixes what 'exogenous' means in this question. Only the good's own price moves you along the demand curve; everything else — income, related prices, tastes — shifts it, and it is a shift that the 2024 item is describing.
CDS_GK_2020_II_Q342020Normally, there will not be a shift in the demand curve when
- (a) price of a commodity falls
- (b) consumers want to buy more at any given price
- (c) average income rises
- (d) population grows
Answer(a) price of a commodity falls
The same distinction run in reverse, and the third CDS paper in five years to test it. Taken with the 2021 item and this one, the message is that shift-versus-movement is a standing favourite and worth being able to answer without thinking.
- practice — not a real PYQ
If the supply curve of a commodity is perfectly inelastic, an increase in demand will lead to
- (a)a rise in price with no change in quantity
- (b)a rise in quantity with no change in price
- (c)a rise in both price and quantity
- (d)no change in either price or quantity
Answer(a) a rise in price with no change in quantity — a vertical supply curve fixes quantity, so the entire adjustment falls on price.
- practice — not a real PYQ
A perfectly elastic supply curve is drawn as
- (a)a vertical straight line
- (b)a horizontal straight line
- (c)a downward sloping line
- (d)a rectangular hyperbola
Answer(b) a horizontal straight line — any quantity is supplied at that one price.