Elasticity of Supply

Elasticity of supply is an essential concept in economics explaining the behaviour of suppliers responding to changes in the market conditions. The concept focuses on the quantity of goods or services that changed in response to the changes in price or other variables. The elasticity of supply offers a peak into the flexibility of producers to help the economists, businesses, and policymakers. This helps them in making an informed decision about the pricing and policy strategies. It is different from demand, where the focus was on the consumer side, here the focus is on the suppliers and their reaction to the marketplace functioning. 

 

What does Elasticity of Supply mean?

The elasticity of supply reflects the responsiveness of the quantity supplied of a good or services to a change. The change is mostly into one of the determinants, primarily its own price. After a change in the price of a product, maybe an increase in the price, suppliers want to supply more to increase the price. This however depends on a number of factors, which includes resources, production capacity, and time. Elasticity shows this responsiveness. 

For example, when the price of pulses increase, farmers wish to grow more wheat for higher revenue. If they are easily able to shift to pulses from other crops, the supply is termed as elastic. However, under circumstances such as limited land or resources, the supply can be inelastic. 

Thus, elasticity helps in determining how easily the suppliers respond to a price change. 

 

What are the factors affecting Elasticity of Supply?

There are several factors which affect the elasticity of supply. Whether you are in business trying for expansion, an investor analyzing industry behaviour, or a student understanding economic theories, comprehending the factors offers a better chance at all these activities. 

The factors affecting Elasticity of Supply are listed below: 

• Availability of Resources: Under the presence of raw materials, labor, and machinery, suppliers are easily able to go for production, which makes supply more elastic. 
• Time Period: With a longer period of time, the supply is elastic. Making changes in the production level is tough, so suppliers usually want a better time period. 
• Flexibility in Production: The industries with a flexible production line are able to shift between products easily.
• Storage Capacity: When the suppliers are able to store a product easily, they hold on to the goods and release them when the price increases. 
• Nature of the Good: In case of agricultural goods there are constraints like natural resources, season, and growing time which makes the supply mostly inelastic. However, in case of manufactured goods, the supply can be more elastic. 

 

What are the key types of Elasticity of Supply?

Elasticity of supply is not constrained to only price, but related goods, and the impact of income in some cases. These different types of elasticity refer to the degree of responsiveness of the quantity supplied. 

The key types of elasticity are following: 

1. Price Elasticity of Supply 

The price elasticity of supply is the most common type of elasticity. The responsiveness of the suppliers to a change in price is measured while any other factor remains constant. It is the percentage change of the quantity supplied from a 1% change in price. Businesses, policymakers, and economists understand and predict the supply level shift according to the market conditions shift. The product with high elasticity can be produced quickly if the price increases. 

Formula for the price elasticity of supply 

 

Price Elasticity of Supply (PES) =  % Change in the Quantity Supplied/ % Change in Price    Interpretation:  PES > 1: Elastic supply (Responsive) PES < 1: Inelastic supply (Not Responsive) PES = 1: Unit elastic supply  PES = 0: Perfectly inelastic (No change in supply despite price)  PES = ∞: Perfectly elastic (Small change in price causes infinite change in supply)

 

For example, when the price of a good increases by 10%, and the quantity supplied increases by 30%, then PES would be, 

30%/ 10% = 3.0 

This means that the supply is elastic, and the producers are highly responsive to the price change 

 

2. Cross Elasticity of Supply 

The cross elasticity of supply measures how the quantity supplied of one good is related to the change in price of another good. When producers use the same resources for multiple goods, the cross elasticity happens. 

Formula for elasticity of supply is: 

 

Cross Elasticity of Supply = % Change in Quantity Supplied of Good X/ % Change in Price of Good Y

 

For Example, a sweet shop produces both sweets and bread. If the price of sweets increases, the shop might allocate more raw materials and labor into the sweets production and reduce bread production. Here, the supply of bread is affected by the price of sweets. 

 

3. Income Elasticity of Supply 

This is a rare type of elasticity of supply, which is not frequently discussed. Some economic models consider using this method. It reflects the responsiveness of supply to changes in producer income or revenue levels, especially in long-term investments or capacity building. This type of elasticity uses a less direct approach in price elasticity. It is relevant in investment heavy industries like real estate or manufacturing infrastructure. 

 

What is the Importance of Elasticity of Supply 

There are different implications with a wide range of supply elasticity. This helps the businesses understand the speed with which they can react to the market prices and demand changes. Government and policymakers use the concept of elasticity in predicting the industrial response to taxes, subsidies or regulations. The resource allocation helps in efficient planning by predicting the responses in different sectors. Companies determine the pricing decisions without disrupting supply.

 

Learn More 

• Discharge of Contract
• Why is demand curve downward sloping?
• Forms of Business Organization
• Market Price

 

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Frequently Asked Questions (FAQs) 

What happens when the elasticity of supply is zero? 

When the elasticity supply is zero, it indicates that the supply is perfectly inelastic– producers are not able to change the quantity supplied regardless of the price changes. 

Is elasticity of supply always positive or negative?

Typically, the elasticity of supply is positive, because the rise in price increases the quantity supplied. 

Why does the elasticity of supply affect inflation?

When the supply is inelastic, prices rise after an increase in demand, which leads to inflation. When the supply is elastic, it can expand with demand which helps in controlling the inflation.