ELASTICITY OF SUPPLY, TYPES AND ITS IMPORTANCE
Elasticity of supply measures the ex to which the quantity of a commodity supplied by a producer changes as a result of a little change in the price of the commodity. Elasticity of Supply
Elasticity of supply may be defined as the degree of responsiveness of the quantity supplied of a commodity to change in the price of a commodity.
What is elasticity of demand?
Elasticity of supply measures the ex to which the quantity of a commodity supplied by a producer changes as a result of a little change in the price of the commodity. Elasticity of Supply (ES)
= Percentage change in supply
Percentage change in price
Types of price elasticity of supply
- Elastic supply: Supply is said to be elastic if a small change in price leads to a greater change in the quantity of goods supplied. In this case, elasticity is greater than one or unity, i.e E = >1<infinity. This type of elasticity is also known as fairly elastic supply.
- Inelastic supply: Supply is said to be inelastic if a large change in price leads to a smaller or slight change in the quantity of goods supplied. In this case, elasticity is less than one but greater than zero, i.e E = >0<1. This type of elasticity can also be described as fairly inelastic supply.
- Unity or unitary elastic supply: Supply is said to be unitary when a change in price leads to an equal change in the quantity of goods supplied. In other words, a 5% change in price will lead to a 5% change in supply. In this situation, elasticity is equal to one, i.e E = 1.
- Perfectly elastic supply or infinitely elastic supply: supply is said to be perfectly elastic when a change in price brings about an infinite effect on the quantity of goods supplied.
In other words, a slight increase in price can make producers to increase the supply of the commodity while a slight decrease in price will make producers to stop the supply of the commodity. In this case, elasticity is equal to infinity.
- Perfectly inelastic supply or zero elastic supply: Supply is said to be perfectly inelastic if a change in price has no effect whatsoever on the quantity of goods supplied. In this situation, elasticity is equal to zero, i.e. E=0
Measurement of elasticity of supply
Elasticity of supply can be measured or calculated by using the co-efficient of price elasticity of supply. The formulae used in calculating the elasticity of supply is:
Elasticity of Supply (ES)
= % change in supply
= % change in price
= %AOS where:
∆ = Change
QS = Quantity supplied
P = Price
% = Percentage
As explained earlier, when:
- Elasticity is equal to one, elasticity of supply is unity.
- Elasticity is greater than one, elasticity of supply is elastic.
- Elasticity is less than one, elasticity of supply is inelastic.
(ii) 0.5 or ½ is less than one. Hence, the co-efficient of price elasticity of supply is inelastic.
FACTORS AFFECTING ELASTICITY OF SUPPLY
- Availability of factors of production: Where factors of production are easily available, supply will be elastic and vice versa
- The higher the cost of production, the more inelastic the supply and vice versa
- Possibility of factor substitution: If the input required in producing a good have many substitutes, supply will be elastic. But if there are no substitutes supply will be inelastic.
- Production Time: Production takes time. The shorter the period it takes to produce a good the more elastic the supply. For products whose production time is long, supply will be inelastic in the short run.
- Number of different goods produced by the producers: Where the producer produces many goods, the supply of any one good will be elastic.
This is because when the price of a good changes, the producer can easily increase the supply by diverting resources to it or decrease the supply by taking resources away from its production. Where the producer produces only one good, supply will be inelastic.
- Number of different markets in which the producer can sell: If he sells in many markets, the supply in any one market will be elastic since he can increase or decrease the supply in any of the markets.
- Capacity utilization: When producers have spare capacities, supply will be elastic and vice versa.
- Durability of the product: Durable commodities tend to be more elastic than
- The ease of entry of new firms into the industry makes supply elastic. Restrictions of
- new firms make supply inelastic.
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