A decrease in supply will have the greatest effect on price, when the product’s demand is
Inelastic
When supply falls, the supply curve shifts leftward and the market moves up along the existing demand curve. How much of that adjustment shows up as a price rise, and how much as a fall in quantity, depends entirely on how responsive demand is.
The effect on price is greatest when demand is inelastic. With inelastic demand the demand curve is steep: buyers are not willing or able to reduce their purchases much even when price rises, because the good has few substitutes or is a necessity. Since quantity can hardly adjust, almost the whole burden of clearing the market falls on price, and the price rise is correspondingly large.
With elastic demand the opposite happens. Buyers cut back sharply in response to a small price increase, so the market clears mainly through a fall in quantity and the price barely moves. In the limiting case of perfectly elastic demand the demand curve is horizontal and the price does not change at all - the entire adjustment is in quantity. Unitary elastic demand lies between these cases and produces a moderate price change, not the greatest one.
Hence a decrease in supply has the greatest effect on price when demand is inelastic.
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