Perfectly Elastic Demand Maintains Constant Price

Steps:

• A decrease in supply shifts the supply curve left, creating a surplus at the original price.
• For equilibrium price to remain unchanged, quantity demanded must exactly match the new lower supply quantity.
• This requires demand to be infinitely responsive to any price change, absorbing the supply shift without price adjustment.
• Thus, the price elasticity of demand (PED) is infinite, meaning horizontal demand curve.

Why D is correct:

• Infinite PED means demand is perfectly elastic; even a tiny price increase would drop quantity demanded to zero, preventing price rise despite supply decrease (law of demand).

Why the others are wrong:

• A: PED of -1 (unit elastic) would cause proportional price and quantity changes, raising price.
• B: Zero PED (perfectly inelastic) would cause large price increase with no quantity change.
• C: +1 indicates positive elasticity, implying a Giffen good, but price would still rise with supply decrease.

Final answer: D