Elasticity of Supply

ELASTICITY OF SUPPLY

Responsiveness of producers to changes in the price of their goods or services. As a general rule, if prices rise so does the supply.

Elasticity of supply is measured as the ratio of proportionate change in the quantity supplied to the proportionate change in price. High elasticity indicates the supply is sensitive to changes in prices, low elasticity indicates little sensitivity to price changes, and no elasticity means no relationship with price. Also called 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 / Percentage change in price

Kinds Of Supply Elasticity

1.       Price elasticity of supply:

Price elasticity of supply measures the responsiveness of changes in quantity supplied to a change in price.

2.     Perfectly inelastic:

If there is no response in supply to a change in price. (Es = 0)

3.       Inelastic supply:

The proportionate change in supply is less than the change in price (Es =0-1)

4.       Unitary elastic:

The percentage change in quantity supplied equals the change in price (Es=1)

5.       Elastic:

The change in quantity supplied is more than the change in price (Ex= 1- ∞)

6.       Perfectly elastic:

Suppliers are willing to supply any amount at a given price (Es=∞) 44 The major determinants of elasticity of supply are availability of substitutes in the market and the time period, Shorter the period higher will be the elasticity.