Business Economics · Ch 5 — Revenue, Supply and Pricing
Elasticity of Supply
Elasticity of Supply
The law of supply tells us the direction in which quantity supplied changes; elasticity of supply measures the degree — how responsive quantity supplied is to a change in price. Formally, the price elasticity of supply () is the ratio of the percentage change in quantity supplied to the percentage change in price:
Because price and quantity supplied move in the same direction, is normally positive. Five standard degrees are recognised:
| Value of | Name | Meaning |
|---|---|---|
| Perfectly inelastic | Quantity supplied is fixed whatever the price (vertical supply curve). | |
| Inelastic (less elastic) | Quantity supplied changes proportionately less than price. | |
| Unitary elastic | Quantity supplied changes exactly in proportion to price (any straight line through the origin). | |
| Elastic (more elastic) | Quantity supplied changes proportionately more than price. | |
| Perfectly elastic | An unlimited quantity is supplied at one price; below it, nothing (horizontal supply curve). |
Determinants of supply elasticity — supply tends to be more elastic when: production can be expanded quickly and cheaply; the firm holds spare capacity or storable stocks; there is a longer time period to adjust; and inputs can be shifted easily from other uses. Supply is less elastic for goods that take a long time to produce (agricultural crops within a season), or where capacity is hard to change. …
The degree of responsiveness of quantity supplied to a change in price, ; …
Supply with ; quantity supplied changes exactly in proportion to price — the property of any straight-line supply curve pas …
Elasticity measured using the averages of the two prices and two quantities as the base, appropriate for a large change between two poi …