Elasticity of Supply

Price Elasticity of Supply

• Elasticity of Supply (Es)• Determinants of Price Elasticity of Supply

Price Elasticity of Supply

• A measure of the extent to which the quantity supplied of a good changes when the price of the good changes, and all other influences on seller’s plans remain the same (cateris paribus)

• Price Elasticity of Supply (Es)

= % Change in Qs

% Change in Price

Computing Price Elasticity of Supply

• Percentage change in quantity supplied

Percentage change in price

• If Price Elasticity of Supply > 1, Supply is elastic• If Price Elasticity of Supply = 1, Supply is unit elastic• If price elasticity of supply< 1, Supply is inelastic

Price Elasticity of Supply

• Perfectly Elastic Supply – When the quantity supplied changes by a very large percentage in response to an almost zero increase in price

• Elastic Supply – When the % change in the quantity supplied > the % change in the price

• Unit Elastic Supply – When the % change in the quantity supplied = the % change in price

• Inelastic Supply – When the % change in the quantity supplied is < the % change in price

• Perfectly Inelastic Supply – When the quantity supplied remains the same as the price changes

18-24Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Quantity

S

Quantity

S

Perfectly Elastic Supply

Curve

Perfectly Inelastic Supply

Curve

Influences of Price Elasticity of Supply

• Storage Possibilities

The better the storability, the more elastic is the price elasticity of supply

Think of farm produce vs fertilizer as an example

Factors Determining Elasticity of Supply

• Nature of Commodity• Level of Technology• Time Element• Scale of Production• Size of the firm and the number of

Products Produced• Natural factors• Mobility of Factors

Price Elasticity of Supply

• Price elasticity of supply is a measure of the responsiveness in quantity supplied to changes in price.

E s p ercentage change in q uantity sup p lied

p ercentage change in p r ice

Computing Price Elasticity of Supply

E s p ercentage change in q uantity sup p lied

p ercentage change in p r ice

% Q s

1 2 0 1 0 0

1 0 0

2 0

1 0 02 0 %

%$ 2. $ 2 .

$ 2 .

$ 0.

$ 2 .P

2 0 0 0

0 0

2 0

0 01 0 %

EQ

Pss

%

%.

2 0 %

1 0 %2 0

Measurement of Elasticity of Supply

• The Ratio Method

• The Point Method

Activity

• The price of a commodity changes from Rs. 40 to Rs. 45 per unit,the total quantity supplied of the commodity by the sellers is increased from 1,000 units to 1200 units then calculate the elasticity of Supply?

• You want to manufacture a commodity,the supply of which is completely under your control.Also the supply of which should be elastic,in order to avoid huge losses.Which factor would you want to be in your stride and why?

• Supply Elasticity:Responsiveness of Quantity Supplied to changes in Price