Elasticity of Supply

Elasticity of Supply Is the percentage change in quantity supplied associated with a percentage change in price. Elasticity of supply measures the ratio of the percentage change in the quantity supplied of a product to the percentage change in its price. A commodity’s elasticity of supply depends on how easy it is to shift resources into the production of that commodity and how the costs of producing the commodity vary as its production varies.

Calculating Es = %  Qs / %  P Es = Qs X Po P Qo

Degree Elasticity of Supply Es is indefinite  perfectly elastic Es = 0  perfectly inelastic Es > 1  elastic supply Es < 1  inelastic supply Es = 1  unitary elastic supply

Perfectly elastic supply If the price falls only small amount per unit, then the quantity supplied falls to zero. The price is too low to sustain any producer in the market. Elasticity of supply is indefinite.

Perfectly elastic supply Es is indefinite If the supply curve is horizontal, then supply is PERFECTLY ELASTIC S Qs/ut

Perfectly inelastic supply A perfectly inelastic supply represents a situation in which sellers sell a fixed quantity of good for sale. The price increase from A to B has not fed to increase in quantity supplied. The quantity supplied is totally unresponsiveness to changes in price. The supply curve is vertical = Es = 0

Perfectly inelastic supply Es = 0 S If the supply curve is vertical, then supply is PERFECTLY INELASTIC Qs/ut

Elastic supply When the percentage increase in the price of a good brings about, a larger percentage increase in the supply of a good. The supply curve has a flatter slope : Es > 1

Elastic supply Es > 1 If the supply curve cuts the price axis (Y), then supply is ELASTIC Qs/ut

Inelastic supply When the percentage change in price of a good causes a smaller percentage in quantity supplied. The supply curve has a steeply sloped : Es < 1

Inelastic supply Es < 1 If the supply curve cuts the quantity axis (X), then supply is INELASTIC Qs/ut

Unit elastic supply The percentage change in price brings about the same percentage change in quantity supplied of a good. the supply curve comes out of the origin : Es = 1

Unit elastic supply Es = 1 If the supply curve comes out of the origin, then supply is UNITARY ELASTIC Qs/ut

Determinants of Price Elasticity of Supply Time Ability to store output Factor mobility Change in cost of production Excess supply Availability of infrastructure facilities Agricultural or industrial products

Time If the price of a commodity rises and the producers have enough time to make adjustment in the level of output, the elasticity of supply will be more elastic. If the time period is short and the supply cannot be expanded after a price increase, the supply is relatively inelastic.

Ability to store output The goods which can be safety stored have relatively elastic supply over the goods which are perishable and do not have storage facilities.

Factor mobility If the factors of production can be easily moved from one use to another, it will affect elasticity of supply. The higher the mobility of factors, the greater is the elasticity of supply of the good and vice versa.

Changes in cost of production If with the expansion of output, marginal cost increases and marginal return declines, the price elasticity of supply will be less elastic to that extent.

Excess supply When there is excess capacity and the producer can increase output easily to take advantage of the rising prices, the supply is more elastic. In case the production is already up to the maximum from the existing resources, the rising prices will not affect supply in the short period. The supply will be more inelastic.

Availability of infrastructure facilities If infrastructure facilities are available for expanding output of a particular good in response to the rise in prices, the elasticity of supply will be relatively more elastic.

Agricultural or industrial products In agriculture, time is required to increase output in response to rise in prices of goods. The supply of agricultural goods is fairly inelastic. As regards the supply of manufactured consumer goods, it is comparatively easy to increase production in a short period. Therefore, the supply of consumer goods is fairly more elastic.

Features of elasticity of supply Elastic goods Inelastic goods PES value Greater than 1 Less than 1 A rise in price means A larger rise in supply A smaller rise in supply Slope of supply curve Flat Steep The good is produced Rapidly Slowly The time period is Months Days The firm has Large stocks Limited stocks Example Mortobike Beef