Theory Of Supply

Elasticity of Supply

The law of supply states that there is a direct relationship between the quantity supplied and the price of a commodity. To point out, this is a very qualitative statement. However, markets for different commodities differ in ways we can’t even imagine. Interestingly, the concept of elasticity of supply handles all this with ease.

Elasticity of Supply

The elasticity of supply establishes a quantitative relationship between the supply of a commodity and it’s price. Hence, we can express the numeral change in supply with the change in the price of a commodity using the concept of elasticity. Note that elasticity can also be calculated with respect to the other determinants of supply.

However, the major factor controlling the supply of a commodity is its price. Therefore, we generally talk about the price elasticity of supply. The price elasticity of supply is the ratio of the percentage change in the price to the percentage change in quantity supplied of a commodity.

 Es= [(Δq/q)×100] ÷ [(Δp/p)×100] = (Δq/q) ÷ (Δp/p)

Δq= The change in quantity supplied

q= The quantity supplied

Δp= The change in price

p= The price

Elasticity from a Supply Curve

Along with the method mentioned above, there are two more ways to calculate the price elasticity of supply, both of which make use of the supply curve. We can either calculate the elasticity at a specific point on the supply curve, known as point elasticity or between two prices, known as arc-elasticity.

The formula for calculating the point elasticity of supply is:

Es= (dq/dp)×(p/q)

Here dq/dp is the slope of the supply curve.

The formula for calculating the arc-elasticity of supply is:

Es= [(q1 – q2)/( q1 + q2)] × [( p1 + p2)/(p1 – p2)]

Types of Elasticity of Supply

Price Elasticity of Supply(Source: economicsonline)

1. Perfectly Inelastic Supply

A service or commodity has a perfectly inelastic supply if a given quantity of it can be supplied whatever might be the price. The elasticity of supply for such a service or commodity is zero. A perfectly inelastic supply curve is a straight line parallel to the Y-axis. This is representative of the fact that the supply remains the same irrespective of the price.

The supply of exclusive items, like the painting of Mona Lisa, falls into this category. Whatever might be the price on offer, there is no way we can increase its supply.

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2. Relatively Less-Elastic Supply

When the change in supply is relatively less when compared to the change in price, we say that the commodity has a relatively-less elastic supply. In such a case, the price elasticity of supply assumes a value less than 1.

3. Relatively Greater-Elastic Supply

When the change in supply is relatively more when compared to the change in price, we say that the commodity has a relatively greater-elastic supply. In such a case, the price elasticity of supply assumes a value greater than 1.

4. Unitary Elastic

For a commodity with a unit elasticity of supply, the change in quantity supplied of a commodity is exactly equal to the change in its price. In other words, the change in both price and supply of the commodity are proportionately equal to each other. To point out, the elasticity of supply in such a case is equal to one. Further, a unitary elastic supply curve passes through the origin.

5. Perfectly Elastic supply

A commodity with a perfectly elastic supply has an infinite elasticity. In such a case the supply becomes zero with even a slight fall in the price and becomes infinite with a slight rise in price. This is indicative of the fact that the suppliers of such a commodity are willing to supply any quantity of the commodity at a higher price. A perfectly elastic supply curve is a straight line parallel to the X-axis.

Solved Example on Elasticity of Supply

Q: Why is the elasticity of supply always a positive number?

Ans: The positive nature indicates that there is a direct relationship between the supply of a commodity or service and its price.

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