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# Elasticity of Supply

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### Elasticity of Supply

1. 1. T- 1-855-694-8886 Email- info@iTutor.com By iTutor.com
2. 2. Price Elasticity of Supply  Law of supply tells us that producers will respond to a price drop by producing less, but it does not tell us how much less. The degree of sensitivity of producers to a change in price is measured by the concept of price elasticity of supply.  Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.  It is a measure of how much the quantity supplied of a good responds to a change in the price of that good.  The elasticity of supply is the same basic formula as the demand elasticity, but looks at the percentage change in quantity supplied instead of percentage change in quantity demanded. PriceinChangePercentage SupplyQuantityinChangePercentage =SupplyofElasticityPrice © iTutor. 2000-2013. All Rights Reserved
3. 3.  If percentage change is not available then:-  Putting both the equation together then,  Example 1. If the quantity supplied of Product B has decreased from 1000 units to 200 units as price decreases from \$4 to \$2 per unit, the coefficient for Es is:  Es = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]} = {(1000 - 200) / 1/2(1000 + 200)} / {(4-2) / 1/2 (4+2)} = 2 21 21 2 1 QsinChangePercentage QQ QQ Where Q1 = initial Qs, and Q2 = new Qs. 21 21 2 1 PriceinChangePercentage PP PP Where P1 = initial Price, and P2 = New Price. 21 21 21 21 2 1 2 1 PP PP QQ QQ Es © iTutor. 2000-2013. All Rights Reserved
4. 4. Ranges of Elasticity  Perfectly Elastic ES =  Relatively Elastic ES > 1  Unit Elastic ES = 1  Relatively Inelastic ES < 1  Perfectly Inelastic ES = 0 © iTutor. 2000-2013. All Rights Reserved
5. 5. A Variety of Supply Curves Perfectly Inelastic Supply - Elasticity equals 0 Inelastic Supply- Elasticity is less than 1 Price Quantity100 \$10 \$5 1. An increase in price... 2. ...leaves the quantity supplied unchanged. Price Quantity100 \$5 \$4 1. A 22 % increase in price... 2. ...leads to 10% increase in Quantity. 110 Supply Supply © iTutor. 2000-2013. All Rights Reserved
6. 6. Unit Elastic Supply - Elasticity equals 1 Elastic Supply - - Elasticity is greater than 1 A Variety of Supply Curves Price Quantity \$5 \$4 1. A 25 % increase in price... 2. ...leads to a 25% increase in Quantity. 100 Price Quantity100 \$5 \$4 1. A 22 % increase in price... 2. …leads to a 67% increase in Quantity. 167 125 © iTutor. 2000-2013. All Rights Reserved
7. 7. Quantity Price Supply\$4 1. At any price above \$4, quantity supplied is infinite. 2. At exactly \$4, producers will supply any quantity. 3. At a price below \$4, Quantity supplied is zero. Perfectly Elastic Supply - Elasticity equals infinity © iTutor. 2000-2013. All Rights Reserved
8. 8. Determinants of supply elasticity  The following list contains the main determinants of supply elasticity. 1. Product Type 2. Time 3. Production Capacity 4. Input substitution -- Flexibility and Mobility  Product Type - The type of product impacts how quickly a producer is able to respond to a change in price. A manufacturing firm may be able to quickly adjust production levels with only minor adjustments in the equipment while other products such as apples require several years to establish a new orchard. Since child care services requires relatively few skills compared to the those of a physician, the supply elasticity of child care services is more elastic than that of physician services.  Time - Time is a key determinant of supply. In the case of apples and some other agriculture products, the immediate elasticity of supply is very inelastic, i.e., there are only so many apples available for sale today. However, with time producers are able to respond to the increase in price, manufacturing firms can build new facilities, farmers can plant additional acres to the particular crop. Thus in time, the elasticity of supply becomes more elastic. © iTutor. 2000-2013. All Rights Reserved
9. 9.  Production Capacity - If a firm is already operating at full capacity, then to increase supply would require building additional facilities and purchasing new equipments. A firm that is operating at below full capacity, can respond to a price increase quicker than a firm that is already at full capacity.  Input substitution -- Flexibility and Mobility  Another determinant in the elasticity of supply is input substitution. As the price of a good increases, how easily can inputs that were used in the production of another good be switched over to producing the good with the higher price? P Q Short run Intermediate run Long run © iTutor. 2000-2013. All Rights Reserved
10. 10. Oil and elasticity of supply  World supply of oil following a large rise in world demand Variable amount of spare capacity among the major oil producers Can oil stocks be put onto the market to meet the rise in demand? Oil supply might be inelastic if current output is close to capacity © iTutor. 2000-2013. All Rights Reserved
11. 11. Elasticity of supply of new housing  The supply of new housing  Planning permission + availability of land to develop + shortages of skilled labour  Time lags in the production process – new housing developments take months to complete © iTutor. 2000-2013. All Rights Reserved
12. 12. Elasticity of supply of drugs Short term supply is dependent on stocks of product available If stocks are low, supply cannot increase in the short term to meet demand Debate over the use of patents and how this limits production in the long run © iTutor. 2000-2013. All Rights Reserved