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PRICE ELASTICITY OF SUPPLY:

The relative response of a change in quantity supplied to a change in price. More specifically the price elasticity of supply is the percentage change in quantity supplied due to a percentage change in price. This notion of elasticity captures the supply side of the market. A comparable elasticity on the demand side is the price elasticity of demand. Other notable supply elasticities are income elasticity of demand and cross elasticity of demand.
The price elasticity of supply reflects the law of supply relation between price and quantity. An elastic supply means that the quantity supplied is relatively responsive to changes in price. An inelastic supply means that the quantity supplied is not very responsive to changes in price.

Suppose, for example, that the price of hot fudge sundaes increases by 10 percent (say $2.00 to $2.20). The higher price is bound to cause the quantity supplied to increase. The price elasticity of supply answers the question: How much? If the quantity supplied increases by more than 10 percent (say from 100 hot fudge sundaes to 150 hot fudge sundaes), then supply is elastic. If the quantity supplied increases by less than 10 percent (say from 100 hot fudge sundaes to 101 hot fudge sundaes), then supply is inelastic.

A Summary Formula

The price elasticity of supply is often summarized by this handy formula:
price elasticity
of supply
=percentage change
in quantity supplied
percentage change
in price
According to the law of supply, higher supply prices are related to larger quantities supplied. As such, the numerator and denominator of this formula always have the same signs--if one is positive, the other is also positive. If the supply price increases and the percentage change in price is positive, then the quantity supplied increases and the percentage change in quantity supplied is also positive. When calculated, the price elasticity of supply, therefore, is always positive.

A Range of Elasticity

AlternativeCoefficient (E)
Perfectly ElasticE = ∞
Relatively Elastic1 < E < ∞
Unit ElasticE = 1
Relatively Inelastic0 < E < 1
Perfectly InelasticE = 0
The price elasticity of supply is commonly divided into one of five elasticity alternatives--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--depending on the relative response of quantity to price. These five alternatives form a continuum of possibilities.

The chart to the right displays the five alternatives based on the coefficient of elasticity (E).

  • Perfectly Elastic: The top of the chart begins with perfectly elastic, given by E = ∞. Perfectly elastic means an infinitesimally small change in price results in an infinitely large change in quantity supplied.

  • Relatively Elastic: The second category is relatively elastic, in which the coefficient of elasticity falls in the range 1 < E < ∞. With relatively elastic supply, relatively small changes in price cause relatively large changes in quantity. Quantity is very responsive to price. The percentage change in quantity is greater than the percentage change in price. Here a 10 percent change in price leads to more than a 10 percent change in quantity supplied (say maybe 20 percent).

  • Unit Elastic: The third category is unit elastic, in which the coefficient of elasticity is E = 1. In this case, any change in price is matched by an equal relative change in quantity. The percentage change in quantity is equal to the percentage change in price. For example, a 10 percent change in price induces a equal 10 percent change in quantity supplied. Unit elastic is essentially a dividing line or boundary between the elastic and inelastic ranges.

  • Relatively Inelastic: The fourth category is relatively inelastic, in which the coefficient of elasticity falls in the range 0 < E < 1. With relatively inelastic supply, relatively large changes in price cause relatively small changes in quantity. Quantity is not very responsive to price. The percentage change in quantity is less than the percentage change in price. In this case, a 10 percent change in price induces less than a 10 percent change in quantity supplied (perhaps only 5 percent).

  • Perfectly Inelastic: The final category presented in this chart is perfectly inelastic, given by E = 0. Perfectly inelastic means that quantity supplied is unaffected by any change in price. In other words, the quantity is essentially fixed. It does not matter how much price changes, quantity does not budge.

Slope and Elasticity

The price elasticity of supply is related to, but different from, the slope of the supply curve. Consider the formula for calculating the slope of the supply curve.
slope=change
in price
change
in quantity supplied
Now consider the formula for calculating the price elasticity of supply.
price elasticity
of supply
=percentage change
in quantity supplied
percentage change
in price
The key differences between these are:
  • First, price is in the numerator and quantity is in the denominator for slope. In contrast, quantity is in the numerator and price is in the denominator for elasticity. At the very least, slope is the inverse of elasticity. When one is bigger the other is smaller.

  • Second, slope is calculated using the measurement units for price and quantity. In contrast, elasticity is calculated using percentage changes. As such, slope includes the measurement units (such as dollars per hot fudge sundae), whereas elasticity is just a number with no measurement units. The value of slope changes if the measurement units change (such as cents versus dollars). Not so for elasticity. Elasticity is in relative values not absolute measurement units.

Two Determinants

Two factors that affect the numerical value of the price elasticity of supply are the availability of substitutes and time period of analysis. A given good can have a different price elasticity of supply if these determinants change.
  • Availability of Substitutes: The ease with which sellers can find substitutes-in-production affects the price elasticity of supply. The general rule is that goods with a greater availability of substitutes is more sensitive to price changes. With more substitutes available, sellers can easily respond to price changes. Consider, for example, the production of Manny Mustard's Deluxe Club Sandwiches. It has a lot of very close substitutes because the resources used for production can easily switch between different goods. The guy who slices tomatoes for Manny Mustard can easily switch to selling hot dogs at the Shady Valley Primadonnas baseball stadium. The number of available substitutes makes the price elasticity of supply extremely elastic.

  • Time Period of Analysis: The longer the time period of analysis, the more responsive quantities are to price changes. Brief periods do not allow sellers the time needed to adjust their production decisions to price changes. Sellers need time to find resources used in the production of the good. Longer time periods allow sellers the time needed to find alternatives. For example, the supply of the OmniMotors Sports Coupe is not very elastic for a period of a few weeks or even months. Resources used in production cannot easily switch to other goods. However, given enough time, a year or more, resources can move between production, resulting in a more elastic supply.

Three Other Elasticities

The price elasticity of supply is one of four common elasticities used in the analysis of the market. The other three are price elasticity of demand, income elasticity of demand, and cross elasticity of demand.
  • Price Elasticity of Demand: On the other side of the market is the price elasticity of demand. This is the relative response of quantity demanded to changes in the price. It is also analogously specified as the percentage change in quantity demanded to a percentage change in price.

  • Income Elasticity of Demand: This is the relative response of demand to changes in income, or the percentage change in demand due to a percentage change in income. This elasticity quantifies the buyers' income demand determinant.

  • Cross Elasticity of Demand: This is the relative response of demand to changes in the price of another good, or the percentage change in the demand for one good due to a percentage change in the price of the other good. This elasticity quantifies the other prices demand determinant.

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Recommended Citation:

PRICE ELASTICITY OF SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 19, 2018].


Check Out These Related Terms...

     | elasticity | elastic | inelastic | price elasticity of demand | income elasticity of demand | cross elasticity of demand | coefficient of elasticity | elasticity alternatives | elasticity determinants |


Or For A Little Background...

     | market | price | quantity | supply | law of supply | supply curve | determinants | cause and effect | variables |


And For Further Study...

     | elasticity and demand slope | elasticity and supply intercept | supply elasticity and total expenditure | buyers' income, demand determinant | other prices demand determinant | short-run production analysis | marginal cost |


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