Elasticity of Supply: Meaning and Importance
The law of supply explains the general relationship between the price of a commodity and the quantity supplied, but it doesn’t provide specific details about how much supply changes when the price changes. To understand this more clearly, we need to look at the concept of elasticity of supply. In this article, we will discuss key ideas related to the elasticity of supply, the elasticity of the supply formula, different types of elasticity of supply, the supply curve characteristics, how to measure its price elasticity and many more.
What is Elasticity of Supply?
The price elasticity of supply measures how much the quantity supplied changes when the price of a product changes. It helps understand how the supply of a product is affected by price fluctuations in the market. It also provides an idea of the profit that can be earned by selling the product at different prices. Price elasticity of supply refers to how the supply of a good or service reacts to a change in its price. According to basic economic theory, when the price of a product increases, the supply of that product usually decreases.
Similarly, the price elasticity of demand can be studied to understand how demand for a product changes with price changes. If the price of a product changes, the demand for that product changes quickly. This is called price elasticity of demand.
Elasticity of Supply Example
Imagine the price of coffee rises from $3 to $4 per cup. If coffee producers can quickly increase the amount of coffee they produce to meet the higher demand, the supply is considered elastic. This means that producers are able to respond to the price change by supplying more coffee.
On the other hand, if the price of housing rises, but builders cannot quickly construct more houses due to limited land, time, and resources, the supply of houses is considered inelastic. The quantity of houses supplied doesn't change much in response to price increases.
In summary, the elasticity of supply shows how much producers can adjust the quantity they supply when prices change.
Price Elasticity of Supply Formula
After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply formula which is based on its definition.
\[E_{S} = \dfrac{\% \Delta P}{\% \Delta Q}\]
Here, \[E_{S}\] denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by the percentage change in the price of the commodity.
The Law of Supply
In a free market, producers compete to make profits, so profits are never the same over time or for different products. Because of this, entrepreneurs move resources and labour to products that make more money and away from those that make less money.
The law of supply explains that price and quantity are connected. For example, if consumers want more oranges and fewer apples, more money will be spent on oranges, while less will be spent on apples. As a result, the price of oranges goes up.
Steps to Measure Elasticity of Supply:
Calculate the change in quantity supplied: Find the difference in the quantity supplied before and after the price change.
Calculate the change in price: Find the difference in the price before and after the change.
Use the formula: Apply the changes in quantity supplied and price to the formula.
5 Types of Elasticity of Supply
The price elasticity of supply has five types: perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to learn more about each type in detail.
Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage change in the price is zero for any change in the quantity supplied.
More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.
Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.
Less than Unit Elastic Supply: When the supply of a product changes less than its price, we can say that the supply is relatively inelastic. In this situation, the price elasticity of supply is less than 1.
Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality.
It is important to note that the elasticity of supply is always a positive number. This is because the law of supply says that the quantity supplied is always directly related to changes in the price of a product. In other words, when the market price of a product increases, its supply either increases or stays the same.
Determinants of Elasticity of Supply
Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises slowly, then Supply will be elastic.
Time- As supply's price elasticity rises over time, producers would boost the quantity supplied by a larger percentage compared to the increase in price.
Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms. This occurs because other firms can step in to fill the supply gap.
Mobility of Factors of Production- When the factors of production can move easily, the price elasticities of supply become higher. This means that labour and other resources needed for production can be brought in from different areas to boost production quickly.
The Elasticity of Supply Curves
We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types. Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the graph.
Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain conclusions from the different values of elasticity of the supplied formula.
When \[E_{S}\] = infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis.
When \[E_{S} > 1\], a flatter curve (\[S_{2}S_{2}\]) is obtained which when extended intersects the Y-axis.
When \[E_{S} < 1\], it results in a steeper curve (\[S_{3}S_{3}\]), which when extended crosses the X-axis.
When \[E_{S} = 1\], the curve (\[S_{4}S_{4}\]) comes out to be a straight line that passes through the origin at an angle of 45 degrees.
When \[E_{S} = 0\] (Perfectly inelastic supply), the curve (\[S_{1}S_{1}\]) obtained is parallel to the Y-axis.
This graph shows us the relationship between the different types of elasticity of supply and helps in understanding the elasticity of supply definition better.
Did You Know?
Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the market, which means that their prices are inelastic. This is because these goods are crucial to the everyday lives of consumers.
Conclusion
The elasticity of supply is a key concept that helps us understand how producers respond to price changes. It shows the relationship between price and the quantity of a product supplied. The greater the ability of producers to adjust production when prices change, the more elastic the supply. On the other hand, when producers are less able to adjust supply in response to price changes, the supply is considered inelastic.
By measuring the price elasticity of supply, businesses and economists can predict how changes in prices might affect supply in various industries. Understanding this concept is essential for pricing strategies, production planning, and understanding market dynamics. Ultimately, the elasticity of supply plays a significant role in determining how efficiently markets operate in response to changing economic conditions.
FAQs on Elasticity of Supply
1. What is the Relation Between Cost and Production Technique and the Price Elasticity of Supply?
According to the definition of price elasticity of supply, the supply of a product depends on its market price. If the price of a product is lower than its cost of production, the supplier will not make enough profit and, therefore, supply will be limited. However, when the price of the product increases, the supplier will try to produce more. This is where the production technique comes in. If a company has advanced machinery, it can produce more of the product in a shorter time. However, if the company uses older technology, it will not be able to increase production quickly. Therefore, the lower the production cost and the better the production technique, the higher the supply elasticity.
2. How Does the Nature of a Commodity Affect the Price Elasticity of Supply Formula?
We have seen in the elasticity of supply formula that when the change in quantity supplied is zero for any change in the price, the elasticity of supply comes out to be infinite, i.e. perfectly elastic. Now, keeping in mind the elasticity of supply definition, we can say that durable commodities (like plastic bottles) will have a more elastic supply. On the other hand, perishable goods (like vegetables) will have an inelastic supply because, unlike durable goods, they can’t be stored for long and hence, have to be sold immediately after their production irrespective of the price in the market.
3. How to Improve Place Elasticity of Supply?
For companies to remain nimble should the price of their products change, they need to maintain a high level of price elasticity of supply. So, they want to improve profitability at a higher price or reduce production at a lower price. Enhancing the technology used, such as upgrading equipment and software to improve efficiency, improves PES as does increase the stock held and expanding storage space and systems. To know how elasticity can be improved you can refer to vedantu, where the elasticity of supply is explained in detail.
4. Explain any two factors that cause a shift of the supply curve?
Change in Technology- Technological improvements tend to lower marginal costs and average costs. This is because better technology allows the same amount of input to be used to generate higher output. As a result, producers are willing to supply more at the current price. As a result the supply curve shifts towards the right.
Changes in Input Prices- The input price may rise or fall. In the event of an increase in input price, Marginal Cost and Average Cost will increase. As a result, producers will supply less of the commodity at its current price. Therefore, the supply curve would shift backward and vice versa.
5. What is the increase in supply? Identify two factors that may contribute to it?
The term increase in supply refers to when the supply of a commodity increases due to factors other than price rises. The supply curve shifts to the right in this situation.
Reducing the factor price will lower production costs, leading to higher profits. Consequently, the supplier will boost supply in this situation.
Reduced taxation by the government will also decrease the cost of production, in turn, increasing the profit of the supplier. In this case, the supplier would increase the supply of the commodity.
6. What is the elasticity of supply?
The elasticity of supply refers to how much the quantity supplied of a good or service changes in response to a change in its price. It measures the producer's ability to adjust supply based on price changes. A higher elasticity means producers can quickly respond to price changes by increasing or decreasing supply.
7. What are the types of elasticity of supply?
There are three main types of elasticity of supply:
Elastic Supply (PES > 1): Supply responds strongly to price changes.
Inelastic Supply (PES < 1): Supply responds weakly to price changes.
Unitary Elastic Supply (PES = 1): The supply changes proportionally to the price change.
8. How is the elasticity of the supply formula calculated?
The formula for the elasticity of supply is:
$\text{Elasticity of Supply (PES)} = \dfrac{\% \text{ Change in Quantity Supplied}}{\% \text{ Change in Price}}$
It measures the percentage change in the quantity supplied relative to the percentage change in price.
9. Can you give an example of the elasticity of supply?
For example, if the price of a product increases by 10%, and as a result, the quantity supplied increases by 20%, the price elasticity of supply would be:
$PES = \dfrac{20\%}{10\%} = 2$
This means the supply is elastic, as the supply increases more than the price change.
10. What are the determinants of elasticity of supply?
The elasticity of supply is determined by several factors:
Availability of resources: If resources are easy to access, supply is more elastic.
Time period: Over the long term, producers can adjust their supply more easily than in the short term.
Production capacity: If producers have extra capacity, they can increase supply more easily.
Technology: Better technology can make it easier to increase supply quickly.
11. How do you measure the elasticity of supply?
The elasticity of supply is measured by calculating the percentage change in quantity supplied divided by the percentage change in price. A higher ratio means the supply is more elastic, while a lower ratio means it is inelastic.
12. What factors influence the elasticity of supply?
Several factors influence the elasticity of supply, including:
Time: The more time a producer has, the more elastic the supply can be.
Spare capacity: If a company has unused production capacity, it can increase supply more easily.
Storage and availability of stock: The ability to store goods for future sale can make supply more elastic.
Availability of inputs: If inputs are easily accessible and cheap, producers can quickly increase supply.
13. What is an example of inelastic supply?
An example of an inelastic supply is housing. Even if the price of houses increases, builders cannot quickly increase the supply of houses because construction takes time and resources. Hence, supply is inelastic in this case.
14. How does time affect the elasticity of supply?
The elasticity of supply tends to be more elastic in the long term. Over time, producers can adjust their production methods, acquire more resources, or change technologies, allowing them to increase supply more easily in response to price changes.
15. What is the Measurement of Elasticity of Supply?
The Measurement of Elasticity of Supply refers to determining how responsive the quantity supplied of a good is to changes in its price. The elasticity of supply measures this responsiveness in percentage terms. It helps in understanding producers' behaviour and their ability to adjust production based on market conditions.
