Economics

Elasticity of supply

The price elasticity of supply measures the rate of response of quantity supplied to a change in price. It is calculated as:

As with price elasticity of demand, when price changes are large, it is more appropriate to use arc elasticity and when price changes are very small, it is more appropriate to use point elasticity.

If the quantity supplied is fixed, regardless of the price, the supply is perfectly inelastic. When the percentage change in quantity supplied is equal to the percentage change in price, the supply is unit elastic. If there is a price at which sellers are wiling to offer any quantity for sale, the supply is perfectly elastic.

One special case is that for any linear supply curve that passes through origin, the elasticity of supply is 1, that is, the supply is unit elastic.

Classification Elasticity of supply (Elastic & Inelastic supply)

Elastic supply: Elastic supply means that an increase in price causes a bigger % increase in supply. It has a PES of greater than 1.

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Supply will be elastic if it is easy for a firm to increase supply e.g. spare capacity, easy to employ more factors of production

Inelastic supply: This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1

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Supply is often inelastic in the short term, when it is difficult for firms to increase their capacity.

Fixed supply means that supply is not dependent on the price level. Whatever the price, the supply will remain the same. Supply is perfectly inelastic.

Five cases of elasticity of supply

Perfectly Inelastic supply(Elasticity=0): No matter what happens to price, quantity supply remains the same. This will give n elasticity equal to 0.

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Inelastic supply(Elasticity>1) . This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1

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Unit Elastic supply(elasticity=1): It occoures where price and quantity...