The Elasticity of Demand and Supply
The Elasticity of Supply is one of the most important chapters of Class 11 Economics. The following article is perfectly designed to portray the price elasticity of supply formula and several other things in light of the law of supply. The elasticity of demand and supply is nothing but the relationship between the price of a particular commodity and the quantity demanded or supplied of that particular commodity. There are various types of markets in the economy. Surprisingly, the elasticity of supply holds for every type of market.
Define Elasticity of Supply
The quantitative correlation between the price of a commodity and the quantity supplied of that commodity is known as the elasticity of supply. The above elasticity of supply definition stands perfect for all types of markets. Therefore, the mathematical alteration in supply with the change in the price can be derived from the concept of elasticity of supply. There are also a few other determinants of elasticity of supply.
The most significant factor controlling the supply of a particular good is the price of the good. Mathematically, the value can be derived using the elasticity of the supply formula. The elasticity of the supply formula is as follows:
\[Es = (\frac{\triangle{q}}{q})\times100 \div (\frac{\triangle{p}}{p}) \times100 = (\frac{\triangle{q}}{q}) \div(\frac{\triangle{p}}{p})\]
Here, \[\triangle{q}\] stands for the change in quantity supplied
q Stands for the quantity supplied
\[\triangle{p}\] stands for the change in price
p stands for the price
Apart from the above-mentioned technique to calculate the elasticity of supply, there are another two methods to derive the elasticity of supply formula. Those two formulas are based on the supply curve. One is point elasticity in which elasticity can be calculated at a specific point of time and another is arc elasticity in which the same is calculated between two prices.
Point elasticity of supply formula: Es= (dq/dp) \[\times\] (p/q)
Arc-elasticity of supply formula: \[Es= \frac{(q_1−q_2)}{(q_1+q_2)} \times \frac{(p_1+p_2)}{(p_1−p_2)}\]
Various Types of Price Elasticity of Supply in a Single Graph
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1. Perfectly Elastic Supply:
If there is infinite elasticity, then it is considered a perfectly elastic supply. In this scenario, with a minor fall in the price level, the supply will become zero and with a minor rise in the price, the supply will become infinite. The perfectly elastic supply example is that in such a market the suppliers desire to supply any quantity of the commodity if there is a higher level of price. A perfectly elastic supply curve is depicted as a straight line that is parallel to X-axis.
2. Unit Elastic Supply:
If the change amount supplied is exactly equal to the change in its price, then it is termed as unit elastic supply or unitary elastic supply. In the above-mentioned scenario, the price elasticity of supply is equal to 1.
3. Relatively Greater-Elastic supply:
Relatively greater elastic supply occurs when the change in supply is relatively greater as compared to the change in price. In this case, the value of price elasticity of supply is greater than 1.
4. Relatively Less-Elastic supply:
Relatively Less Elastic supply occurs when the change in supply is relatively lesser as compared to the change in price. In this case, the value of price elasticity of supply is less than 1.
5. Perfectly Inelastic Supply
A service or commodity is termed as perfectly inelastic when a certain quantity of the said commodity can be supplied irrespective of the price. The value of the price elasticity of supply is zero.
What is Price Elasticity?
The economic concept which is used to measure the change in the aggregate quantity that is demanded of a good or service when there is a movement in the price of that good or service is referred to as price elasticity. If the quantity demanded of a product shows a big fluctuation when its price is increased or decreased then the product is said to be elastic. If the quantity demanded of a product does not change much when its price is increased or decreased then the product is said to be inelastic. There are four types of elasticity which are-
Elasticity of Demand
Income Elasticity
Cross Elasticity
Price Elasticity of Supply
Let us study the Price Elasticity of Supply in detail.
Price Elasticity of Supply
The measure of the responsiveness of the supply of goods or services after there is a change in its price is known as price elasticity of supply. The supply of goods, according to economic theory, increases as the price rises and as the price decreases, the supply also decreases.
To determine the price elasticity of supply following points are needed to be considered-
Ease of switching- The supply of products is more elastic when the production of the goods can be varied.
Length of production period- The response to a quick production is easier than a price increase.
Factor mobility- The supply curve is more elastic if moving the resources into the industry is easier.
Number of producers- The entry into the market is easier.
Ease of storage- The elastic response will increase the demand if the goods can be stored easily.
Spare capacity- When there is a shift in the demand it becomes easy to increase production.
The formula for Price Elasticity of Supply
The price elasticity of supply can be calculated by the percentage change in the quantity supplied to the percentage change in the price of the product.
\[{\text{Price Elasticity of a Supply}} = \frac{\text{% change in Quantity Supplied}}{\text{% change in Price}}\]
When the price elasticity of supply is >1, the supply is elastic.
When the price elasticity of supply is<1, the supply is inelastic.
When the price elasticity of supply is 0, this means there is no change in the prices.
The factors that affect the price elasticity of supply are-
The nature of the industry- The nature of the industry under consideration is a very important factor that affects the price elasticity of supply.
Nature-constraints- Nature can restrict the supply of some products. For example- It takes 15 years for a rubber tree to grow.
Risk-Taking- The willingness to take risks by the entrepreneurs also affect the price elasticity of supply.
Nature of goods- Another important factor that can affect the price elasticity is the availability of the products.
Definition of commodity- The price elasticity of supply is great if the commodity is defined narrowly.
Time- In the long run, supply is considered to be more elastic as compared to that in the short run.
The cost of attracting resources- Attracting the resources from the other industries is an important factor to increase the supply.
Level of price- Different prices can vary the price elasticity of supply.
Factor mobility- The price elasticity will be greater when the mobility of the services is high.
Determinants of Elasticity of Supply
The determinants of elasticity of supply are as follows:
Number of producers
Spare capacity
Effortlessness of switching
Ease of storage
Length of the period of production
The time frame of training
Mobility of factors
Reaction of costs
Did You know?
Price elasticity of supply depends upon the tenure of the production. This means it is different in the long run and the short run.
Availability of raw materials is one of the important factors affecting the elasticity of supply.
The elasticity of demand and supply is the backbone of microeconomics.
A perfectly elastic supply curve is horizontal to the axis.
FAQs on Price Elasticity of Supply: Meaning and Determinants
1. What is the Price Elasticity of Supply (PES) in simple terms?
Price Elasticity of Supply measures how much the quantity of a product a seller is willing to supply changes when its price changes. In simple terms, it tells us how responsive or sensitive suppliers are to a price change. If a small price increase causes suppliers to produce a lot more, the supply is considered elastic.
2. What are the main factors that determine the price elasticity of supply?
Several factors influence how responsive supply is to price changes. The main determinants include:
- Time Period: Supply is more elastic in the long run as producers have more time to adjust production levels.
- Production Capacity: If a firm has spare capacity, it can easily increase output, making supply more elastic.
- Availability of Inputs: If raw materials and labour are easily available, supply can be increased quickly, making it more elastic.
- Nature of the Good: Durable goods often have a more elastic supply than perishable goods, which cannot be stored for long.
- Production Technology: Firms with flexible and advanced technology can adjust their supply more easily, leading to higher elasticity.
3. What are the five different types of price elasticity of supply?
The price elasticity of supply is categorized into five types based on its value:
- Perfectly Elastic Supply (Es = ∞): An infinite quantity is supplied at a specific price, but none at all if the price drops even slightly.
- Relatively Elastic Supply (Es > 1): The percentage change in quantity supplied is greater than the percentage change in price.
- Unitary Elastic Supply (Es = 1): The percentage change in quantity supplied is exactly equal to the percentage change in price.
- Relatively Inelastic Supply (Es < 1): The percentage change in quantity supplied is less than the percentage change in price.
- Perfectly Inelastic Supply (Es = 0): The quantity supplied does not change at all, regardless of any change in price.
4. How is the price elasticity of supply calculated?
The most common way to calculate the price elasticity of supply is using the percentage method. The formula is:
PES = Percentage Change in Quantity Supplied / Percentage Change in Price
A result greater than 1 indicates elastic supply, less than 1 indicates inelastic supply, and equal to 1 indicates unitary elastic supply.
5. What is the key difference between the price elasticity of supply and demand?
The main difference lies in their relationship with price. Price elasticity of supply shows a positive relationship; as the price goes up, the quantity supplied also tends to go up. In contrast, price elasticity of demand shows a negative (or inverse) relationship; as the price goes up, the quantity demanded typically goes down.
6. Why is time considered the most important factor affecting the elasticity of supply?
Time is crucial because it dictates a producer's ability to adjust to price changes. In the short run, it's difficult to change production levels significantly (e.g., build a new factory or hire many new workers), so supply is often inelastic. In the long run, producers have enough time to alter production capacity, making supply much more elastic and responsive to price signals.
7. Can the price elasticity of supply be zero? What does that mean for a product?
Yes, it can. A price elasticity of supply of zero (Es = 0) is called perfectly inelastic supply. This means the quantity supplied is fixed and will not change no matter how much the price increases or decreases. This is typical for goods where production cannot be increased, such as a unique piece of art like the Mona Lisa, seats in a stadium for a specific match, or a plot of land.
8. How does the elasticity of supply help in understanding the impact of a new tax?
Elasticity of supply helps determine who bears the burden of a new tax. If supply is inelastic, producers cannot easily reduce their production, so they end up absorbing a larger share of the tax. If supply is elastic, producers can more easily adjust their output and will pass a larger portion of the tax on to consumers in the form of higher prices.
