Elasticity of Supply

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Description of Elasticity of Supply. Explanation.

 

Definition Elasticity of Supply. Description.


Elasticity of Supply or Price Elasticity of Supply (PES) is the responsiveness of the quantity supplied of a good to a given change in price.

PES is showing the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

Formula for Elasticity of Supply. Calculation

The formula for price elasticity of supply is:


Percentage change in quantity supplied / Percentage change in price


The (price) elasticity of supply can be calculated as the percentage change in supply that occurs in response to a percentage change in price. For example, if, in response to a 15% rise in the price of a good, the quantity supplied increases by 30%, the price elasticity of supply would be 30% / 15% = 3.

If supply is elastic (i.e. PES > 1), then producers can increase output without a rise in cost or a time delay.

If supply is inelastic (i.e. PES <1), then firms find it hard to change production in a given time period.


Factors Influencing Elasticity of Supply

The main factors determining the price elasticity of supply (PES) are:

  • AVAILABILITY OF RAW MATERIALS. For example, availability may limit the amount of some mineral that can be produced in a country regardless of its price. On the other hand, the price of Rembrand paintings is not affected by their supply.
  • LENGTH AND COMPLEXITY OF PRODUCTION. Much depends on the complexity of the production process. If some manufacturing process is relatively simple because the labour required is largely unskilled and production facilities are simple, the PES for such industry is elastic. If on the other hand, the manufacturing process is relatively complex and involves many layers or parties, the PES for such products is relatively inelastic.
  • MOBILITY OF FACTORS. If the factors of production are easily available and if a manufacturer producing one good can switch their resources and put it towards the creation of a product in demand, then it can be said that the PES is relatively elastic.
  • RESPONSE TIME. The more time a manufacturer has to respond to price changes, the more elastic the supply. Supply is normally more elastic in the long run than in the short run for produced goods, since it is generally assumed that in the long run all factors of production can be utilised to increase supply, whereas in the short run only labor can be increased, and even then, changes may be prohibitively costly. For example, a cotton farmer cannot respond right away (i.e. in the short run) to an increase in the price of soybeans because of the time it would take to procure the necessary land.
  • INVENTORIES. A manufacturer who has a supply of goods or available storage capacity can quickly increase supply to market if needed.
  • SPARE OR EXCESS PRODUCTION CAPACITY. A manufacturer who has unused capacity can quickly respond to price changes in a market, assuming that variable factors are readily available. The existence of spare capacity within a firm, would be indicative of more proportionate response in quantity supplied to changes in price (hence suggesting price elasticity).

Compare: Bullwhip Effect.


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