Note on Price elasticity of supply

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Elasticity of supply: The law of supply tells us that quantity supplied varies positively with price. The law of supply shows the direction of change in the quantity supplied with the change in the determinants of supply such as change in cost of production, time factor, nature of the commodity, availability of facilities for expanding output, etc. But this law does not explain what percentage or proportionate change in determinants of supply leads to what percentage or proportionate change in the quantity supply. Thus, to measure the percentage or proportionate change in the quantity supplied with its determinants, elasticity of supply was introduced.

Elasticity of supply is used to measure the degree of relationship between determinants of supply and quantity supplied. Generally, elasticity of supply is the ratio of the percentage change in the quantity supplied to the percentage change in its determinant of supply.

Mathematically,

Ed = %change in quantity supplied/ % change in any one quantitative determinant of supply

Price Elasticity of Supply

Price elasticity of supply is the ratio of the percentage or proportionate change in the quantity supplied with the percentage or proportionate change in price. In other words, price elasticity of supply is the proportionate change in quantity supplied divided by the proportionate change in price.

The price elasticity of supply measures the degree of responsiveness of quantity supplied for a certain commodity to the change in its price. In other words, the price elasticity of supply is defined as the 'ratio of percentage change in the quantity supplied to the percentage change in price. It can be expressed mathematically as follows:

Price elasticity of supply (ep) = Percentage change in quantity of supply / Percentage change in price

Where, ep = Coefficient of price elasticity of supply.

The price elasticity of supply is always positive due to the inverse relationship between the price and quantity supplied.

Numerical example:

The price of rice rises from Rs.40/kg to Rs.50/kg. Due to rise in price of rice its supply increases from 450kg to 500kg. Find the price elasticity of supply for rice.

Here,

Initial quantity supply (Q) = 450kg

Final quantity supply = 500kg

Change in quantity supply (∆Q)= 500-450= 50kg

Initial Price (P) = Rs.40

Final price = Rs.50

Change in price (∆P) = 50-40= Rs.10

Ep =( ∆Q/∆P)×(P/Q)

= (50/10)×(40/450)

= 0.4

Types of Price Elasticity of Supply

There are five types of price elasticity of supply. They are as follows:

  1. Perfectly Inelastic Supply (ep = 0): If there is no response in the quantity supplied due to the change in price, it is said to be a perfectly inelastic supply. More simply, when the supply for a commodity does not change despite change in price, the supply is said to be perfectly inelastic. For example: As a result of a rise in the price from Rs.18 to Rs.20 or a fall in the price from Rs.20 to 18, the quantity of product supplied remains constant i.e. 1000 kg in the society.
  2. Relatively Inelastic Supply (ep < 1): When the percentage or proportionate change in the quantity supplied of a particular commodity is less than percentage or proportionate change in the price, it is said to be a relatively inelastic supply. For example: As a result of fall in price of a product Rs.50 to Rs.40 per kg, the quantity supplied decreases from 800 kg to 790 kg. As a result of increase in price of a noodles form Rs.10 to Rs.20 per unit, then the quantity supplied decreases from 740 kg to 800 kg.
  3. Unitary Elastic Supply (ep = 1): When the percentage or proportionate change in the quantity supplied is equal to the percentage or proportionate change in price, the supply for a commodity is said to be unitary elastic supply. For example: As a result of a fall in the price of A goods from Rs.100 to Rs.50 per unit the quantity supplied decreases from 200 units to 100 units. When 10% decrease in the price of X goods, the quantity supplied of these goods fall by 10%.
  4. Relatively Elastic Supply (ep > 1): When the percentage or proportionate change in the quantity supplied for a commodity is greater or more thanpercentage or proportionate change in price, the supply for a commodity is said to be a relatively elastic supply. For example: As a result of a fall in the price of X from Rs.10000 to Rs.8000 per unit the quantity supplied decreases from 1000 units to 500 units. As a result of an increase in the price of Y from Rs.900 to Rs.1000 per unit the quantity supplied increases from 500 units to 800 units.
  5. Perfectly Elastic Supply (ep = ∞): If a small change in price (i.e. fall or rise) leads to infinity in aupply or zero in supply, the supply for commodity is said to be a perfectly elastic supply. Supply of a commodity is said to be perfectly elastic if negligible change in price would lead to infinite change in the quantity supplied. Visibly, no change in price causes in infinite change in supply. It is perfectly hypothetical concept. For example: As a result of a small rise in the price of y goods from Rs.99 to Rs.100, the quantity supplied becomes infinity from 200 units.

Determinants of Price Elasticity of supply:

The major determinants of price elasticity of supply of a commodity with respect to its own price is a as follows:

  1. Elasticity of supply depends upon the change in cost that is incurred by the firms when they increase the quantity of their output.
  2. Time period is also an important determinant of supply. In general, supply elasticity is likely to be higher in the long run than in the short run.
  3. Nature of commodity is also an important determinant of elasticity of supply. The supply of durable goods is relatively elastic. The supply of perishable commodities cannot be altered significantly in response to changes in price and hence their supply is relatively less elastic.
  4. The response of the producers to have a change in price depends on the availability of production facilities.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan

  • Elasticity of supply is used to measure the degree of relationship between determinants of demand and quantity supplied.
  • Price elasticity of supply is the proportionate change in quantity supplied divided by the proportionate change in price.
  • If there is no response in the quantity supplied due to the change in price, it is said to be a perfectly inelastic supply.
  • When the percentage change in the quantity supplied of a particular commodity is less than percentage change in the price, it is said to be a relatively inelastic supply.
  • When the percentage change in the quantity supplied is equal to the percentage change in price, the supply is said to be unitary elastic supply.
  • When the percentage change in the quantity supplied for a commodity is greater percentage change in price, it is said to be a relatively elastic supply.
  • Supply of a commodity is said to be perfectly elastic if negligible change in price would lead to infinite change in the quantity supplied.

 

 

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