Elasticity of Supply

Introduction:

Elasticity of supply measures the responsiveness of quantity supplied to a change in the price of a good or service. It helps us understand how easily producers can adjust their output in response to market price fluctuations. This is crucial for analyzing market behavior, predicting the impact of price changes, and understanding how quickly markets can reach a new equilibrium.

Key Points:

• Responsiveness: Elasticity of supply indicates how sensitive producers are to price changes.
• Percentage Changes: It's calculated using percentage changes in quantity supplied and price.
• Time Horizon: The time frame significantly impacts elasticity; supply is generally more elastic in the long run.
• Positive Value: Price elasticity of supply is typically positive because price and quantity supplied usually move in the same direction (Law of Supply).
• Categories: Supply can be classified as elastic, inelastic, unit elastic, perfectly elastic, or perfectly inelastic.

Main Content:

1. Defining Price Elasticity of Supply (PES)

Price elasticity of supply (PES) is defined as the percentage change in quantity supplied divided by the percentage change in price. Mathematically:

PES = (% Change in Quantity Supplied) / (% Change in Price)

Or, using symbols:

PES = (%ΔQs) / (%ΔP)

Where:

• %ΔQs = Percentage change in quantity supplied.
• %ΔP = Percentage change in price.

The formula can also be expressed as:

PES = (ΔQs / Qs) / (ΔP / P)  = (ΔQs / ΔP) * (P / Qs)

Where:

• ΔQs is change in Qs
• Qs is initial Quantity supplied
• Δp is change in price
• P is initial price

Example: If a 10% increase in the price of hamburgers leads to a 15% increase in the quantity of hamburgers supplied, the PES is 1.5 (15%/10% = 1.5).

2. Categories of Price Elasticity of Supply

Based on the numerical value of PES, we can categorize supply elasticity:

• Elastic Supply (PES > 1): A percentage change in price leads to a larger percentage change in quantity supplied. Producers are very responsive to price changes. Example: If price increases by 10%, quantity supplied increases by more than 10%. The supply curve will be flatter
• Inelastic Supply (PES < 1): A percentage change in price leads to a smaller percentage change in quantity supplied. Producers are not very responsive to price changes. Example: If price increases by 10%, quantity supplied increases by less than 10%.The supply curve will be steeper.
• Unit Elastic Supply (PES = 1): A percentage change in price leads to an equal percentage change in quantity supplied. Example: If price increases by 10%, quantity supplied increases by 10%.
• Perfectly Elastic Supply (PES = ∞): Producers are willing to supply any quantity at a specific price, but nothing at a lower price. The supply curve is horizontal.
• Perfectly Inelastic Supply (PES = 0): Quantity supplied does not change regardless of the price. The supply curve is vertical. Example: The supply of original Van Gogh paintings.

3. Determinants of Supply Elasticity

Several factors influence the price elasticity of supply:

• Time Horizon: This is the most important determinant. In the short run, it may be difficult for producers to significantly change their output levels because factors of production (like machinery, factory size) are fixed. In the long run, producers can adjust all factors of production, making supply more elastic.
• Availability of Inputs: If the inputs needed to produce a good are readily available, supply will be more elastic. If inputs are scarce or difficult to obtain, supply will be less elastic.
• Ease of Switching Production: If producers can easily switch to producing other goods, supply will be more elastic. For example, a farmer who can easily switch between growing wheat and corn will have a more elastic supply for both crops.
• Storage ability: If a commodity is easy to store there will be more elasticity of supply.
• Production Capacity: If firms are operating below full capacity, they can more easily increase output in response to a price increase, leading to greater elasticity. If firms are at full capacity, supply will be less elastic.

4. Graphical Representation

• Elastic Supply: A flatter supply curve.
• Inelastic Supply: A steeper supply curve.
• Perfectly Elastic Supply: A horizontal supply curve.
• Perfectly Inelastic Supply: A vertical supply curve.

5. Market Supply Curve

The market supply curve, similar to the market demand curve, is the horizontal summation of the individual supply curves of all producers in the market. This is mentioned on page 27 of the PDF. The market supply curve will also exhibit elasticity, reflecting the combined responsiveness of all producers.

Conclusion:

Price elasticity of supply is a critical concept for understanding how producers respond to price changes. It's determined by factors like the time horizon, availability of inputs, and production capacity. Understanding PES allows us to predict market outcomes and analyze the effects of various economic events and policies, like shifts in demand, taxes, or subsidies. Key takeaways include: The longer the time period, the more elastic the supply; availability of resources influences elasticity; and the categorization of supply elasticity (elastic, inelastic, etc.) provides a framework for analyzing producer behavior.