The Elasticity of Supply Definition
The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to the change in the price of a given commodity. It is an important parameter in determining how the supply of a particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could be made by selling that product at its price difference. In this article, we will discuss the elasticity of the supply formula, different types of elasticity of supply, the supply curve characteristics, and many more.
The price elasticity of supply refers to the response to a change in a good or service's price by the supply of that good or service. According to basic economic theory, the supply of goods decreases when its price increases.
Similarly, one can also study the price elasticity of demand. This illustrates how easily the demand for a product can change based on changes in price. Price changes fairly rapidly if the price of a product changes. This is known as price elasticity of demand.
Price Elasticity of Supply Formula
After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply formula which is based on its definition.
\[E_{S} = \frac{\% \Delta P}{\% \Delta Q}\]
Here, \[E_{S}\] denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by the percentage change in the price of the commodity.
The Law of Supply
Since producers compete for profits in a free market, profits are never constant over time or across different goods. Entrepreneurs, therefore, shift resources and labor efforts towards products that are more profitable and away from those that are less profitable.
The law of supply refers to the tendency for price and quantity to be related. For instance, assume that consumers demand more oranges and fewer apples. More dollars are bidding for oranges, but fewer for apples, resulting in higher orange prices.
5 Types of Elasticity of Supply
Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to know them in more detail.
Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage change in the price is zero for any change in the quantity supplied.
More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.
Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.
Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price elasticity of supply is less than 1.
Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality.
The point to be noted is that the elasticity of supply is always a positive number. This is because the law of supply states that the quantity supplied is always directly proportional to the change in the price of a particular commodity. This means that the supply of a product either increases or remains the same with the increase in its market price.
Determinants of Price Elasticity of Supply
Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises slowly, then Supply will be elastic.
Time- As the price elasticity of supply increases over time, producers would increase the quantity supplied by a greater percentage than the price increases.
Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms. This occurs because other firms can step in to fill the supply gap.
Mobility of Factors of Production- When the factors of production are mobile, then the price elasticities of supply are higher. This means that labor and other manufacturing inputs may be imported from other regions to quickly increase production.
The Elasticity of Supply Curves
We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types. Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the graph.
Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain conclusions from the different values of elasticity of the supplied formula.
When \[E_{S}\] = infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis.
When \[E_{S} > 1\], a flatter curve (\[S_{2}S_{2}\]) is obtained which when extended intersects the Y-axis.
When \[E_{S} < 1\], it results in a steeper curve (\[S_{3}S_{3}\]), which when extended crosses the X-axis.
When \[E_{S} = 1\], the curve (\[S_{4}S_{4}\]) comes out to be a straight line that passes through the origin at an angle of 45 degrees.
When \[E_{S} = 0\] (Perfectly inelastic supply), the curve (\[S_{1}S_{1}\]) obtained is parallel to the Y-axis.
This graph shows us the relationship between the different types of elasticity of supply and helps in understanding the elasticity of supply definition better.
Did You Know?
Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the market, which means that their prices are inelastic. This is because these goods are crucial to the everyday lives of consumers.
FAQs on Elasticity of Supply
1. What is the Relation Between Cost and Technique of Production and the Price Elasticity of Supply?
According to the elasticity of supply definition, the supply of a product depends upon its market price. So, if the price of that commodity is less than its cost of production, its supply will be less as the supplier will not earn enough profit by selling that product. However, when its value in the market increases, the supplier will try to enhance its production. That’s when the technique of production will come into play. If a firm has advanced machinery for the production of that commodity, it will be able to produce it in large quantities in a shorter time. On the other hand, if a firm uses outdated technology for manufacturing, it won’t be able to increase its production much within a limited time frame. So, the lesser the cost of production and the better the technique, the more is the supply elasticity.
2. How Does the Nature of a Commodity Affect the Price Elasticity of Supply Formula?
We have seen in the elasticity of supply formula that when the change in quantity supplied is zero for any change in the price, the elasticity of supply comes out to be infinite, i.e. perfectly elastic. Now, keeping in mind the elasticity of supply definition, we can say that durable commodities (like plastic bottles) will have a more elastic supply. On the other hand, perishable goods (like vegetables) will have an inelastic supply because, unlike durable goods, they can’t be stored for long and hence, have to be sold immediately after their production irrespective of the price in the market.
3. How to Improve Place Elasticity of Supply?
For companies to remain nimble should the price of their products change, they need to maintain a high level of price elasticity of supply. So, they want to improve profitability at a higher price or reduce production at a lower price. Enhancing the technology used, such as upgrading equipment and software to improve efficiency, improves PES as does increase the stock held and expanding storage space and systems. To know how elasticity can be improved you can refer to vedantu, where the elasticity of supply is explained in detail.
4. Explain any two factors that cause a shift of the supply curve?
Change in Technology- Technological improvements tend to lower marginal costs and average costs. This is because better technology allows the same amount of input to be used to generate higher output. As a result, producers are willing to supply more at the current price. As a result the supply curve shifts towards the right.
Changes in Input Prices- The input price may rise or fall. In the event of an increase in input price, Marginal Cost and Average Cost will increase. As a result, producers will supply less of the commodity at its current price. Therefore, the supply curve would shift backward and vice versa.
5. What is the increase in supply? Identify two factors that may contribute to it?
The term increase in supply refers to when the supply of a commodity increases due to factors other than price rises. The supply curve shifts to the right in this situation.
The lowering of the factor price will reduce the cost of production, which will increase profit. The supplier will then increase supply in this situation.
Reduced taxation by the government will also decrease the cost of production, in turn, increasing the profit of the supplier. In this case, the supplier would increase the supply of the commodity.