price elasticity of supply
Price elasticity of supply measures the relationship between change in quantity supplied and a change
in price. The formula for price
elasticity of supply is:
Percentage
change in quantity supplied
The value of elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa.
FACTORS THAT DETERMINE ELASTICITY OF SUPPLY
The elasticity of supply depends on the following factors
The value of price elasticity of supply is positive, because an increase in price is likely to increase the quantity supplied to the market and vice versa. The elasticity of supply depends on the following factors:
SPARE CAPACITY
How much spare capacity a firm has - if there
is plenty of spare capacity, the firm should be able to increase output quite
quickly without a rise in costs and therefore supply will be elastic
STOCKS
The level of stocks or inventories - if stocks
of raw materials, components and finished products are high then the firm
is able to respond to a change in demand quickly by supplying these stocks
onto the market - supply will be elastic
EASE OF FACTOR SUBSTITUTION
Consider the sudden and dramatic increase in
demand for petrol canisters during the recent fuel shortage. Could manufacturers
of cool-boxes or producers of other types of canister have switched their
production processes quickly and easily to meet the high demand for fuel containers?
If capital and labour resources are occupationally mobile then the elasticity of supply for a product is likely to be higher than if capital equipment and labour cannot easily be switched and the production process is fairly inflexible in response to changes in the pattern of demand for goods and services.
TIME PERIOD
Supply is likely to be more elastic, the longer
the time period a firm has to adjust its production. In the short run, the
firm may not be able to change its factor inputs. In some agricultural industries
the supply is fixed and determined by planting decisions made months before,
and climatic conditions, which affect the production, yield.
Economists sometimes refer to the momentary time period - a time period that is short enough for supply to be fixed i.e. supply cannot respond at all to a change in demand.
ILLUSTRATING PRICE ELASTICITY OF SUPPLY
When supply is perfectly inelastic, a shift in the demand curve has no effect on the equilibrium quantity supplied onto the market. Examples include the supply of tickets for sports or musical venues, and the short run supply of agricultural products (where the yield is fixed at harvest time) the elasticity of supply = zero when the supply curve is vertical.
When supply is perfectly elastic a firm can supply any amount at the same price. This occurs when the firm can supply at a constant cost per unit and has no capacity limits to its production. A change in demand alters the equilibrium quantity but not the market clearing price.
When supply is relatively inelastic a change in demand affects the price more than the quantity supplied. The reverse is the case when supply is relatively elastic. A change in demand can be met without a change in market price.
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