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Assignment
On
How Supply increase affects an Industry with Inelastic demand

Submitted to:
Mr. S M A Moudud Ahmed
Assistant Professor
Institute of Business Administration,
Jahangirnagar University.

Submitted by:
TEAM INVISIBLE HAND
Majid A. Mabud (2003)
Md. Nazmul Hasan Shihab (2009)
Rahim Ul-Islam Remon (2017)
Md. Shafayat Hossain Jahan (2020)
Abrar Shahriar (2199)

BUS 108; Microeconomics

Institute of Business Administration,
Jahangirnagar University.
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Introduction

When a 1% change in price produces less than a 1% change in quantity demanded, the goods
have price inelastic demand (Samuelson, Nordhaus). In other words, when changes in price
of a commodity, leaving everything else constant, doesn’t affect much in quantity demanded
shows an Inelastic demand. Salt is one of the prime commodities that enjoys an Inelastic
demand in the market as it is perhaps the only industrial mineral that is used by virtually
every human being.

What happens when supply increases if demand is inelastic?

(c’) An increased supply will decrease P (Price) most when demand is inelastic.

In a competitive market when supply increases, the competition among different companies
also increases. At that point, people tend to buy those companies' salt which are relatively
cheaper. For this, different companies decrease their prices so that their products are bought.
In this way increased supply decreases price most.

(d’) An increased supply will increase Q (Quantity demanded) least when demand is
inelastic.

As the demand of salt is inelastic, the increased supply will barely affect quantity demanded.
Because the need for consumption of salt is quite fixed. Increased supply will turn the price
down but as the demand is inelastic, sales will not be affected much by less price. Thus
increase in supply will increase Q least.

From the graph we can see that in case of inelastic demand when supply increases, price
decreases drastically whereas quantity demanded increases little. But in case of elastic
demand the effect is reversed . This is because the Demand Curve in Inelastic demand is
negative steeper than that in the elastic demand.
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Historical data to prove points further

● From recent data depicting salt demand and production over 2000 - 2010, it is evident
that Demand has increased little over time though supply has fluctuated many times,
proving inelasticity of salt further.
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● Source:.http://en.banglapedia.org

Source: Price Charts - Tridge

● This data of the last 6 months of Salt price in Bangladesh from Tridge.com proves
that retail price of packaged salt has declined remarkably while price of unrefined salt
remains unchanged. The price dropped because some unscrupulous importers
imported table salt naming them Sodium Sulphate which is used for other purposes at
low cost from China and India which increased the supply of salt in the market. Since
the Salt industry is an industry with inelastic demand, the increase in supply caused a
drastic decrease in its price.
● Source:https://www.thedailystar.net/backpage/news/tears-salt-farmers-1875991

Finally, we can conclude that while the demand is inelastic, increased supply will decrease
price most and increase quantity demanded least. We showed how increasing supply affects
price with historical data (Chart 02) along with the theoretical explanation. We have also
presented how fluctuations in supply affects the quantity demanded with historical data (table
01) and the theoretical explanation.