Elasticity - Market Adjustment

Supply Shift - Shortrun/Longrun Demand 1

The graph to the right shows a reduction in supply from S₁ to S₂. At first, in the short-run the operative demand curve is D_SR. As we have learned, both demand and supply can become more elastic over time. In the short run the reduction is supply leads to a large increase in price (from P* to P₂), and a modest drop in quantity (from Q* to Q₂).