Elasticity of Supply

This measures how responsive a business’s supply is to a change in price. It is measured using the following formula, with Q on top:

 

Price elasticity of supply = % change in quantity supplied / % change in price

 

If a percentage change in price leads to a smaller percentage change in quantity the good is deemed to have price inelastic supply.  This means that the business’s supply very responsive to changes in price.

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There has been a 100% increase in the price which has led to a 25% increase in the quantity demanded.  The value of PES is therefore 25/100 = 0.25.  Supply will be price inelastic if its value is between 0 and 1.  Agricultural goods and houses have an inelastic supply because they are unable to respond to changes in price due to the time it takes for crops to grow or for houses to be planned and built.

 

If a percentage change in price leads to a larger percentage change in the quantity supplied, we describe the product as having price elastic demand and it is responsive to changes in price.

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There has been a 25% increase in the price which has led to a 50% increase in the quantity demanded.  The value of PED is therefore 50/25 = 2.  Supply will be price elastic if its value is above 1, this is the value you would expect most goods to have.

 

Similarly to price elasticity of demand, there are special cases of elasticity of supply.

 

If elasticity is equal to one then the good will have unitary elasticity; meaning a percentage change in price will lead to an equal percentage change in the quantity supplied.

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A perfectly inelastic supply curve, with a value of zero, means that the quantity supplied doesn’t change irrespective of the level of demand.

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Elasticity of supply is equal to infinity when it is perfectly elastic; any decrease in price will lead to the quantity supplied falling to zero.

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