Elasticity of Supply

Elasticity of Supply

The term elasticity shows the reaction of one variable with respect to a change in other variables on which it is dependent. In economics, the term elasticity refers to a ratio of the relative changes in two quantities. It measures the responsiveness of one variable to the changes in another variable.

The elasticity of supply is a measure of the degree of responsiveness of quantity supplied to a given change in price. It can be expressed as follows:

             % Δ Quantity Supplied
PES = ————————————–
                      % Δ Price

Generally, the co-efficient of price-elasticity of supply always holds a positive sign because there is a direct relationship between the price and quantity supplied. It increases with a rise in price and decreases with a fall in price.

Symbolically,

The value of elasticity coefficients will vary from 0 to infinity. There are 5 types of price elasticity of demand:

Perfectly elastic supply: In this case, a very small change or no change in price causes an infinite change in quantity supplied. The supply curve is a horizontal line and parallel to OX axis.

Perfectly inelastic supply: In this case, any change in price leaves the quantity supplied unchanged. The supply curve is a vertical straight line and parallel to OY axis.

Relatively elastic supply: In this case, the change in supply is more than that of the price, or we can say that percentage change in quantity supplied exceeds the percent change in price. hence, the elasticity is greater than one. Relatively elastic supply is generally called 'elastic supply' or 'more elastic supply'. In this case, the supply curve is relatively flat.

Relatively inelastic supply: In this, a huge change in price leads to a less than proportional change in supply. In other words, the percentage change in quantity supplied falls short of the percentage change in price. This can be represented by a steeper supply curve. Hence, elasticity is less than one. Relatively inelastic supply is popularly known as 'inelastic supply' or 'less elastic supply'.

Unitary elastic supply: In this, there is a proportionate change in price leads to an equal proportional change in supply. Hence, elasticity is equal to unity. 

Methods for Measuring Price Elasticity of Supply

There are basically two methods to measure price elasticity of supply:

i. Percentage method

ii. Geometric method

 

Percentage Method: 

The price elasticity of supply is the ratio of the percentage change in the amount supplied to the percentage change in the price of the commodity. This method is also known as the ‘Proportionate Method’ or ‘Mathematical Method’.

 

The elasticity of Supply (Es) = Percentage change in quantity supplied/ Percentage change in Price

where:

-q= initial quantity supplied
-p = initial price
-Δq= change in quantity supplied
-Δp= change in price
-If EP>1, demand is elastic.
-If EP< 1, demand is inelastic.
-If Ep= 1, demand is unitary elastic.

for example

Price	Quantity
10	100
12	120

where:

-P=10
-Q=100
-Δ P=2
-ΔQ=20

ES=1

In this case, elasticity is equal to one and unitary elasticity supply

Price	Quantity
10	100
12	150

where

-P=10
-Q=100
-Δ P=2
-ΔQ=50

ES=2.5

In this case, elasticity is more than one and relatively elasticity supply.

Price	Quantity
10	100
12	106

where
P=10
Q=100
Δ P=2
Δ Q=6

ES=.3 

In this case, elasticity is less than one and relatively inelasticity supply.

 

If the proportional change in quantity supplied and proportional change in price is equal, then the price elasticity of supply will be equal to one and unitary elasticity supply. 

If the proportional change in quantity supplied is more than the proportional change in price, then the price elasticity of supply will be more than one and relatively elasticity supply.

If the proportional change in quantity supply is less than the proportional change in price, then the price elasticity of supply will be less than one and relatively inelasticity supply.

Point Elasticity Or Geometrical Method: Geometric method is the technique to measure the price elasticity of supply at any given point on the supply curve. This method is also known as the Arc method.

Relatively Elastic Supply (ES > 1): A supply curve, which passes through the Y-axis and meets the extended X-axis at some point, then supply is highly elastic.

The intercept on X Axis=LQ

Quantity Supplied=OQ

In the above diagram, Elasticity of Supply is greater than 1.

Since LQ is greater than OQ, the elasticity of supply at point M is highly elastic, or we can say that a straight line supply curve passing through the Y-axis or having a negative intercept on X-axis is highly elastic [ES>1]

Less Elastic Supply (ES<1): If a supply curve meets the X-axis at some point, then supply is less elastic.

Intercept on X Axis=LQ

Quantity Supplied=OQ

In the above diagram, the Elasticity of supply is inelastic as LQ is less than OQ so it is less elastic.[ES<1]

Unitary Elastic Supply (ES=1):

If the straight-line supply curve passes through the origin[O], then the elasticity of supply will be equal to one. 

The intercept on X Axis=OQ

Quantity Supplied=OQ

In the above diagram, Elasticity of Supply is equal to one as 

OQ/OQ = 1. So it is a unitary elastic supply.

Determinants of Elasticity of Supply

Time Period: Time has a great influence on the elasticity of supply. Supply is more elastic in the long run and it tends to be inelastic in the short run. It is easier to shift resources among products in response to changing conditions in the market and the producers have enough time to make adjustments in the level of output in the long term.



Ability to store production: There will be inelasticity in supply for the perishable goods and other goods which do not have storage facilities.

While the goods which can be stored properly, have a relatively elastic supply.

Availability and mobility of factors: If the factors of production are available in plenty and can be easily moved from one occupation to another, the supply tends to be elastic and vice- versa.

Technological improvement: If infrastructure facilities and modern technology is available for expanding output, the elasticity of supply will be relatively more elastic.

Cost of production: If cost rises slowly it will stimulate an increase in supply and it tends to be elastic. If the cost of the production rises rapidly as output expands, then extra benefits gained by increasing output will be choked off by the increase in cost. Hence, supply tends to be inelastic.

Numbers of sellers: If there is an easy entry for sellers into the market, supply tends to become more elastic.

Kinds and nature of the market: The supply of agricultural goods is inelastic because sufficient time is required to increase output in response to rising prices of goods. It is comparatively easy to increase the production of the manufactured consumer goods and supply tends to be elastic.

The goal of the firm: If the firm’s goal is to maximize the profit, then supply tends to be inelastic. On the other hand, if the goal of the firm is to increase the output, then it tends to be elastic.

Government policy: If the government is imposing high taxes and strict in making economic policies for production, then supply tends to be inelastic and vice-versa.

 

 

Dr. Swati Gupta

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