Elasticity of Supply

Elasticity of supply refers to the measure of responsiveness of quantity supplied of a commodity to change in the factors affecting supply. Price elasticity of supply is the measure of responsiveness of quantity supplied of a commodity to change in its own price. It is abbreviated as ES and calculated as:

Elasticity of Supply

Elasticity of Supply will have a positive value because of the direct relationship between the price of the product and quality supplied.

  • If ES is greater than 1, then the supply is said to be price elastic
  • If ES < 1, then supply is price inelastic
  • If ES = 1, then supply is unit elastic

Types of Price Elasticity of Supply

  • Perfectly elastic supply
  • Elastic supply
  • Unit elastic supply
  • Inelastic supply
  • Perfectly inelastic supply

Factors Affecting Price Elasticity of Supply

1) Mobility of factors of production

If they are highly mobile then supply will be price elastic since more factors can be employed quickly when the prices increase thus increase in supply

2) The level of employment of resources

This refers to the utilization and allocation of resources. If the factors are fully utilized supply will be price inelastic due to the fact that all the facts are occupied and thus cannot be mobilized in order to increase supply. However if they are under employed, supply will be price elastic.

3) Production period

For products that take short period of time to produce their supply tend to be price elastic. While those that take a longer period will be price inelastic because it will take a while before the products can reach the market.

4) Nature of the commodity

Price elasticity of supply for perishable goods tend to be inelastic due to the fact that the goods do not respond to price fall as they cannot be easily stored. On the other hand supply for durable goods tend to be price elastic since they can be store when the price falls thus contracting supply.

5) Risk taking

If the entrepreneurs are willing to take risk then supply of the products will be price elastic. Risk taking will in return be determined by the prevailing conditions in the economy, e.g. political stability, security, government incentives, infrastructure, etc.

6) Level of stock

If the level of stock is high, the price elasticity will be price elastic because if the price of a good increases, more of the good will be supplied from the stock

7) Time period

Supply for most goods and services will tend to be more elastic in the long run than in the short run because producers need more time to reorganize factors of production so that they can increase supply of the products.

Importance of Price Elasticity of Supply

  • If supply of a good is price elastic thus an increase in demand will benefit both the producer and consumer of products because the producer will be in apposition to supply relatively more of their products and consumer will eventually pay a relatively lower price.
  • If the supply of a commodity is price inelastic, business may risk losing revenue when there is a fall in the price of their products. This is because they will be forced to sell their products at a loss or a reduced price margin, e.g. In the case of perishable goods, however in the supply of the goods is price elastic the business people may store their products when price fall thus contracting supply e.g. the case of durable goods.

Relationship between Total Revenue and Elasticity

  • Elastic demand: Increase in price will reduce the total revenue while a fall in price increase the total revenue
  • Inelasticity demand Increase in price will reduce the total revenue while a fall in price causes reduction in total revenue.
  • Unit demand change in price will leave the price unchanged.

Application of Elasticity in Economic Policy Decisions

  • Products/services pricing decisions
  • Customer spending programs
  • Production decisions
  • Government policy orientation, e.g. Taxation policy evaluation programs, price control
  • Price discrimination
  • Shift of the tax burden

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