Price Elasticity of Supply:
Law of supply tells us the direction in which supply of a commodity will change as a result of change in its price, but it does not give us the magnitude of change in supply.
Price elasticity of supply gives us information with regard to the magnitude of the change in supply in response to a change in its price.
The price elasticity of supply measures how responsive a specific good’s quantity is to a change in price. Elasticity is an indicator of how price changes affect the supply or demand for a given commodity. Elasticity is characterised as the proportional change of one parameter over the proportional change of another parameter.
Definition :
” Price elasticity of supply measures the degree of responsiveness of the quantity supplied of a commodity to a change in its price”.
It measures the sensitivity of the quantity supplied of a commodity to a change in its price.
In other words, price elasticity of supply is defined as the proportionate change in the quantity supplied of a commodity divided by a given proportionate change in its price.
It may be expressed as:
es = (proportionate change in quantity supplied) ÷ (proportionate change in price)
Where es stands for elasticity of supply
Since elasticity of supply is a ratio between percentage changes and not between absolute numbers, it is independent of unit of measurement like rupees or kilogrammes.
The price elasticity of supply will always be a positive number because the price and the quantity supplied of a commodity are positively related.
Degrees of Elasticity of Supply:
Economists have grouped, various degrees of price elasticity of supply into five categories :
1. Perfectly Elastic (es = infinity)
2. Perfectly Inelastic (es = 0)
3. Unitary Elastic (es =1 )
4. Elastic (es > 1 )
5. Inelastic (es <1 )
1. Perfectly Elastic Supply:
Perfectly elastic supply represents a case in which the quantity supplied of a commodity responds by an infinite amount to a very small change in price.
Perfectly elastic supply refers to a situation when any amount will be supplied at the given price, but nothing will be supplied at a lower price.
Perfectly Elastic Supply Curve
In the given figure, S1 is a perfectly elastic supply curve which runs parallel to X – axis, forming a horizontal straight line.
At price OP, S1 curve has infinite elasticity, showing that sellers are prepared to sell an infinitely large quantity of the commodity at the price OP, and nothing would be supplied at all at a slightly lower price. So the elasticity of supply at OP is infinite.
This is an extreme case of elasticity of supply. It rarely exists in actual practice, but it serves as a very useful bench mark.
2.Perfectly Inelastic Supply :
Perfectly inelastic supply is the case in which there is no supply response, no matter how large a price change takes place.
The quantity supplied does not change with a change in price. The price elasticity is zero at this situation.
Perfectly Inelastic Supply Curve
In the given figure, the supply curve S2 runs parallel to Y- axis and shows that the quantity supplied of a commodity remains OQ, no matter what the price is.
This is an extreme case of supply elasticity. Actual example of perfectly inelastic supply are old paintings, stamps, coins etc.
Mona Lisa Painting: There is only one Mona Lisa painting, a higher price can not bring even one more Mona Lisa painting, therefore the supply of Mona Lisa is perfectly inelastic.
3. Unitary Elastic Supply :
Unitary elastic supply refers to a situation when the percentage change in the quantity supplied of a commodity is exactly equal to the percentage change in its price.
The numerical value of elasticity of supply will be 1 in this case.
Any straight line supply curve drawn through the origin has an elasticity of unity over its entire length, no matter what its slope is.
Unitary Elastic Supply Curve
Thus, the supply curve S3 and S4 have a unitary elasticity at all the points.
4. Elastic Supply:
When the percentage change in the quantity supplied of a commodity is greater than the percentage change in its price.
In this case, the quantity supplied is relatively responsive to change in price. The numerical value of the price elasticity of supply will be greater than 1.
Elastic Supply Curve
Any straight line supply curve that cuts the Y- axis has elastic supply all through.
5.Inelastic Supply:
Supply is said to be inelastic when the percentage change in the quantity supplied of a commodity is less than the percentage change in its price.
In this case, the quantity supplied is relatively less responsive to change in price. Therefore, supply elasticity in this case is less than 1.
Any straight line supply curve that cuts the X – axis has inelastic supply all through.
Inelastic Supply Curve
In the given figure, S6 is an inelastic supply curve.
Any where on this supply curve, the elasticity is less than unitary.
Elasticity is not constant along the supply curve, but it is always less than 1.
Determinants of Elasticity of Supply:
Supply is fairly elastic when (es > 1) means when percentage change in quantity supplied (∆Q ) is greater than percentage change in price (∆P ).
Or ∆Q > ∆P
Then es > 1
Similarly, supply is inelastic when (es < 1) means change in quantity supplied (∆Q) is smaller than the change in price (∆P).
Or ∆ Q < ∆ P
then, es < 1
Elasticity of supply depends upon a number of factors , some of which are :
- Behaviour of Cost of Production
- Time Element
- Nature of the commodity
- Availability of Facilities for Expanding Output
- Nature of Inputs
- Nature of techniques of Production
- Factor mobility
- Risk Taking
- Expectations about Future prices
1. Behaviour of Cost of Production:
Elasticity of supply depends on change in the cost of producing additional quantity of output.
If an increase in output by the firm in an industry causes only a slight increase in their cost per unit or leads to decrease in cost per unit, the supply is said to be fairly elastic.
If, on the other hand, increase in supply leads to a large increase in cost of production, the supply would be relatively inelastic.
2. Time Element :
Time period is an important factor affecting the elasticity of supply.
In short run, a change in price due to the change in demand for a commodity may have a smaller response in the quantity supplied. This is so because the production capacity may be limited. Therefore in the short – run, supply tends to be relatively inelastic.
However in the long – run, new plants can be set up and production capacity can be expanded. Therefore in the long run, supply tends to be elastic.
It can be said that supply elasticity is likely to be higher in the long run than in the short run.
3. Nature of the commodity:
Nature of commodity largely affect the elasticity of supply.
For example, the supply of durable products is relatively more elastic. Durable goods can be stored and hence producers can meet the market demand by running down their stock. Therefore, the supply of such goods can be increased or decreased quickly in response to a change in price.
On the other hand, supply of perishable goods like milk, vegetable, fruits is relatively less elastic. These products can not be stored. Therefore the change in their supply has to be largely through change in production only.
4. Availability of Facilities for Expanding Output :
The response of producers to change in price depends on the availability of production facilities.
If producers have sufficient production facilities such as availability of raw material, power etc., they would be able to increase their supply in response to rise in the prices of the commodities. The supply, therefore, will be elastic.
On the other hand, if there is shortage of power, fuel and essential raw materials, the output would be expanding slowly in response to increase in prices of the commodities. In this case, supply would be relatively elastic.
5. Nature of Input:
Elasticity of supply depends on the nature of inputs used for the production of a commodity.
If the production process requires inputs that are easily available its supply would be more elastic.
On the other hand, if it uses specialised inputs, its supply will be relatively inelastic.
6. Nature of Techniques of Production:
If the production of a commodity involves complex techniques of production, the supply would be inelastic because supply can not be increased easily.
While, goods which requires simple and modern techniques of production will have elastic supply.
7. Factor Mobility:
The ease with which factors of production can be moved from one use to another will affect the elasticity of supply.
If resources can be easily shifted from production of other product to the Production of the product whose price has increased, the price elasticity of supply will be the elasticity.
8. Risk Taking:
The elasticity of supply determined by the willingness of the entrepreneurs to take risk.
If entrepreneurs are willing to take risk, the supply will be more elastic. On the other hand, if the entrepreneurs hesitate to take risk the supply will be inelastic.
9. Expectations about Future Prices:
If the producers expect a rise in the price of a commodity in future, producers will like to hoard the commodity to take advantage of a rise in the future price. The supply will, therefore, be less elastic in the current period.
Conversely, if they expect a fall in the prices in future, they will release the goods from their stocks. The supply will be more elastic.