Elasticity of Supply Unit 2 – Lesson 4

Elasticity of Supply 0 The concept of elasticity of supply measures how responsive the quantity supplied by a seller is to a rise or fall in price. 0 The formula to determine the coefficient of supply is as follows where the percentage of quantity supplied (QS) is divided by the percent change in price (P):

Supply Coefficients 0 The same rule applies to supply coefficients as to demand coefficients. 0 Any supply coefficient less than one is classified as inelastic, 0 equal to one is unitary and 0 more than one is elastic. 0 Intuitively a seller with an elastic supply is better able to take advantage of an increase in the demand of a product.

Example A bakery introduces a new type of bread. The demand is high and the bakery is able to sell the bread for a high price. As a result, the bakery makes more of the new type of bread. Also, other bakeries copy the new type of bread and offer it for sale, as well. Therefore, as the price increases, more is offered for sale, or supplied.

Graphical Representation PriceQuantity Supplied

Calculation of Supply Coefficient PriceQuantity Supplied

Factors affecting Supply Elasticity 0 In general, if the change in quantity supplied does not change significantly with an increase in price then the supply curve for that product is inelastic. There could be many reasons for this relationship: a. if the product requires a long time to produce it will have a less elastic supply b. if the product is easily stored, stock piling a product would make supply more elastic in times of increased demand c. cost factors, e.g. if an item is very expensive to produce it may be difficult to increase supply quickly.

Example 0 Some luxury cars like Rolls Royce are built in relatively small numbers by hand. 0 This method of production is expensive and time consuming. 0 Even if a luxury car company receives more money for their cars, it would not be easy for them to significantly increase supply

Consider this…. 0 The most extreme case of inelasticity of quantity supplied would be for extremely rare and/or irreplaceable items. If a product cannot be replaced then the amount of money offered for it cannot affect the quantity supplied. Example 0 Ancient historical artifacts or works of art cannot be replaced and therefore the quantity of supply is perfectly inelastic and unaffected by price.

Perfectly Inelastic

Further Considerations 0 If the price for a product with an inelastic supply remains high over a protracted period of time, it may become worthwhile for the producers to invest in an increased quantity supplied. For example: a major manufacturer may build a new production facility. Thus, a product with an inelastic supply curve in the short-run may become elastic in the long-run.

Elasticity of Supply in Short and Long Term