price elasticity of supply

 

  • [8] Relatively elastic supply: This is when the Es formula gives a result above one, meaning that when there is a change in price, the percentage change in supply is higher
    than the percentage change in price.

  • Using the above example to show an elastic supply, when there is a 10% increase in price there will be more than a 10% increase in supply.

  • For example, if a product costs $1 and then increases to $1.10 the increase in price is 10% and therefore the change in supply will be less than 10%.

  • Price elasticity of supply, in application, is the percentage change of the quantity supplied resulting from a 1% change in price.

  • For example, there may be an infinite supply of product at a price of $1 but if that price changes to $1.10 then the supply becomes zero.

  • [8] Relatively inelastic supply: This is when the Es formula gives a result between zero and one, meaning that when there is a change in price, the percentage change in supply
    is lower than the percentage change in price.

  • The greater the extent of spare production capacity, the quicker suppliers can respond to price changes and hence the more price elastic the good/service would be.

  • [1] An elasticity of zero indicates that quantity supplied does not respond to a price change: the good is “fixed” in supply.

  • This can be the case where there is a limited quantity of supply, for example, if there is only 200 of a certain product made and there will never be any more made, there
    will be no increase or decrease in the quantity of supply.

  • Since the price must rise substantially to cover this additional expense, supply becomes less elastic at high levels of output.

  • [1] The existence of spare capacity within a firm, would be indicative of more proportionate response in quantity supplied to changes in price (hence suggesting price elasticity).

  • Thus, the responsiveness of quantity supplied to changes in price is high in this region of the supply curve.

  • Using the previous example to show unit elasticity, when there is a 10% increase in price, there will also be a 10% increase in quantity supplied.

  • [7] Curves which cut through the positive part of the quantity axis and have positive quantity supplied (Q = a) even if the price is zero have a > 0 and hence always have
    inelastic supply.

  • Definition & Real-Life Example The slope of a supply curve relates changes in price to changes in quantity supplied.

  • Mobility of factors If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a
    product in demand, then it can be said that the PES is relatively elastic.

  • Linear supply curves which cut through the positive part of the price axis and have zero quantity supplied if the price is too low (P
    < -a/b) have a < 0 and hence they always have elastic supply.

  • These five types help to show how different products supply quantity changes when faced with changed in price.

  • [8] Short-run and long-run Since firms typically have a limited capacity for production, the elasticity of supply tends to be high at low levels of quantity supplied and low
    at high levels of quantity supplied.

  • The price elasticity of supply (PES or Es) is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change
    in its price.

  • Spare or excess production capacity A producer who has unused capacity can (and will) quickly respond to price changes in his market assuming that variable factors are readily
    available.

  • At low levels of quantity supplied, firms typically have substantial capacity available for use, so small increases in price make it profitable for firms to begin to use this
    idle capacity.

 

Works Cited

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Steven; Syverson, Chad (2020). Microeconomics (3rd ed.). New York, NY: Worth Publishers. pp. 797d–797k. ISBN 9781319306793.
o ^ “5.3 Price Elasticity of Supply”. 2016-06-17.
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o ^ Jump up to:a b Suits, Daniel B. in Adams (1990), p. 19, 23. Based on 1966 USDA estimates of cotton production costs among US growers.
o ^ Barnett and Crandall in Duetsch (1993), p.152
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Photo credit: https://www.flickr.com/photos/fugufish/4413509121/’]