Price Elasticity of Supply

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-

1. Elasticity of Demand

2. Income Elasticity

3. Cross Elasticity

4. 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-

1. The nature of the industry- The nature of the industry under consideration is a very important factor that affects the price elasticity of supply.

2. Nature-constraints- Nature can restrict the supply of some products. For example- It takes 15 years for a rubber tree to grow.

3. Risk-Taking- The willingness to take risks by the entrepreneurs also affect the price elasticity of supply.

4. Nature of goods- Another important factor that can affect the price elasticity is the availability of the products.

5. Definition of commodity- The price elasticity of supply is great if the commodity is defined narrowly.

6. Time- In the long run, supply is considered to be more elastic as compared to that in the short run.

7. The cost of attracting resources- Attracting the resources from the other industries is an important factor to increase the supply.

8. Level of price- Different prices can vary the price elasticity of supply.

9. 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:

1. Number of producers

2. Spare capacity

3. Effortlessness of switching

4. Ease of storage

5. Length of the period of production

6. The time frame of training

7. Mobility of factors

8. 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.

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FAQs (Frequently Asked Questions)

1. What are the applications of elasticity in the real world?

The applications of elasticity in the real world are-

• To study the customers and their preferences, economists study the elasticity of the commodity.

• Businesses and firms use elasticity to determine their profits and revenues.

• Effect on trading can be analysed when there are changes in the market with the help of elasticity.

• Government policies can be formulated with the help of elasticity, especially taxation policy.

2. What are the differences between price elasticity and the price elasticity of supply?

The price elasticity of demand represents the changes in the demand that can occur even with the slightest change in the price while price elasticity of supply represents how the quantity supplied is affected when there are changes in the price. The most important difference between the price elasticity of supply and price elasticity of demand is that both of them respond differently when there is an increase or decrease in the price of the commodity. The elasticity of supply decreases with the price decrease, while the demand increases as the price of the commodity are decreased.

3. What is the cross elasticity of demand?

The economic concept that measures how the quantity demanded of a good is responding when there is a change in the price of another good. The cross elasticity of demand can be measured as the percentage change in the demand of a good to the percentage change in the price of other products. The cross-elasticity of demand is always positive for a substitute group as when the price of the substitute group increases, the demand for the product is increased.

To study more about the different types of elasticities students can visit Vedantu’s study material on Elasticity of Demand.

4. Explain the law of supply and demand.

The theory explaining the interaction between the sellers and buyers of a resource is known as the theory of law and supply of demand. This theory explains the relationship between the willingness of people to buy a particular product and the price of that product. Normally, when there is an increase in the price of a product, the demand for the product becomes less yet the willingness of the people to supply the product increases.

5. What should be done when the demand is increased?

If the demand gets increased, it becomes important for the firms to increase the supply as well and for that they should consider the following points-

• If the demand increases, the firms should invest in the spare capacity.

• The production should be outsourced to other companies that can help them to increase the supply.

• Pay overtime to the workers to increase production.

• Hire more workers to increase production.

6. Give a perfect price elasticity of supply example.

Perfectly price elastic supply is not so usual in the modern market scenario. Let us say someone makes some cakes and the cost of the cakes including all the ingredients is Rs. 10 per piece. If he/she sells all the cakes at Rs. 10/- per piece then it is an example of perfectly elastic supply. In this case, if the cost of the cake exceeds Rs. 10/- per cake, then there will be an infinite quantity of supply. A perfectly elastic supply is very much unusual in the present-day market.  The value of the elasticity supply is based on the price.

7. What is the tax burden in perfectly elastic supply?

Tax incidence or tax burden is the consequence of a particular tax on the economic welfare distribution. The burden of tax is also reflected in the perfectly elastic supply curve. The elasticity of supply is one of the determinants in estimating the tax burden on a particular individual. The burden of the tax will increase over the consumers if the supply curve is flatter. If the supply curve remains steeper, then more tax will have to be borne by the producers.

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