Elasticity of SupplyUnit 2 – Lesson 4

Elasticity of Supply

0The concept of elasticity of supply measures how responsive the quantity supplied by a seller is to a rise or fall in price.

0The formula to determine the coefficient of supply is as follows where the percentage of quantity supplied (QS) is divided by the percent change in price (P):

Supply Coefficients

0The same rule applies to supply coefficients as to demand coefficients.

0Any supply coefficient less than one is classified as inelastic, 0equal to one is unitary and 0more than one is elastic.

0 Intuitively a seller with an elastic supply is better able to take advantage of an increase in the demand of a product.

Example

ExampleA bakery introduces a new type of bread. The demand is high and the bakery is able to sell the bread for a high price. As a result, the bakery makes more of the new type of bread. Also, other bakeries copy the new type of bread and offer it for sale, as well. Therefore, as the price increases, more is offered for sale, or supplied.

Graphical Representation

Price Quantity Supplied

2 20

3 40

4 60

5 80

6 100

Calculation of Supply Coefficient

Price Quantity Supplied

2 20

3 40

4 60

5 80

6 100

Factors affecting Supply Elasticity

0 In general, if the change in quantity supplied does not change significantly with an increase in price then the supply curve for that product is inelastic.  There could be many reasons for this relationship:

a. if the product requires a long time to produce it will have a less elastic supply

b. if the product is easily stored, stock piling a product would make supply more elastic in times of increased demand

c. cost factors, e.g. if an item is very expensive to produce it may be difficult to increase supply quickly.

Example

0 Some luxury cars like Rolls Royce are built in relatively small numbers by hand.

0This method of production is expensive and time consuming.

0Even if a luxury car company receives more money for their cars, it would not be easy for them to significantly increase supply

Consider this….

0The most extreme case of inelasticity of quantity supplied would be for extremely rare and/or irreplaceable items. If a product cannot be replaced then the amount of money offered for it cannot affect the quantity supplied.

Example

0Ancient historical artifacts or works of art cannot be replaced and therefore the quantity of supply is perfectly inelastic and unaffected by price.

Perfectly Inelastic

Further Considerations

0 If the price for a product with an inelastic supply remains high over a protracted period of time, it may become worthwhile for the producers to invest in an increased quantity supplied. For example: a major manufacturer may build a new production facility. Thus, a product with an inelastic supply curve in the short-run may become elastic in the long-run.

Elasticity of Supply in Short and Long Term