ABSTRACTION METHODS: Abstraction is the process of simplifying the complexities of the real world by ignoring (hopefully) unimportant details, especially (for our purposes) while doing economic analysis. Three common methods of actual, real world abstraction used in economic theories are words, graphs, and equations. Words can be misunderstood. Graphs are a little more precise. And equations tend to be the most precise of the three.
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ELASTICITY ALTERNATIVES, SUPPLY:
Five categories of the price elasticity of supply that reflect the entire range of the relative responsiveness of a change in quantity supplied to a change in price. These five alternatives--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--are often illustrated by different supply curves. The price elasticity of demand is also reflected by five comparable alternatives. The five alternatives for the price elasticity of supply are perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic. These alternatives form a continuum ranging from perfectly elastic at one end to perfectly inelastic at the other.
A Chart of Five
The chart to the right displays the five alternatives based on the coefficient of elasticity (E). The "middle" of this continuum is occupied by unit elastic. In that the "unit" and the two "perfectly" are really borders, boundaries, and endpoints, most of the real world action involving the price elasticity of supply is reflected by the two "relatively" alternatives--relatively elastic and relatively inelastic. Most supply curves encountered in the real world are likely to be relatively inelastic or relatively elastic.
|E = ∞
|1 < E < ∞
|E = 1
|0 < E < 1
|E = 0
And Five CurvesThis exhibit below and to the right can be used to display five supply curves that depict the five alternative categories of elasticity.
- Perfectly Elastic: Perfectly elastic supply means an infinitesimally small change in price results in an infinitely large change in quantity supplied. The coefficient of elasticity for this alternative is E = ∞. A click of the [Perfectly E] button reveals a perfectly elastic supply curve, which is horizontal. The focus of this supply curve is on a fixed price (Po), that is, an infinite range of quantities is associated with the same price. Infinitesimally small changes away from this fixed price cause the quantity to explode to infinite or drop to zero. Perfectly elastic supply for a good can occur, in theory, when sellers are able to switch resources among a large number of perfect substitutes-in-production.
|Five Supply Curves
- Relatively Elastic: Relatively elastic supply means a relatively small change in price results in a relatively large change in quantity supplied. The coefficient of elasticity for this alternative is in the range of 1 < E < ∞. A click of the [Relatively E] button reveals a relatively elastic supply curve, which is flat but not horizontal and intersects the price axis. The focus of this supply curve is on a narrow range of prices, that is, a large range of quantities are associated with a small range of prices. Small changes in price cause large changes in quantity supplied. Relatively elastic supply for a good occurs when sellers are able to switch resources among a large number of close but not necessarily perfect substitutes-in-production.
- Unit Elastic: Unit elastic supply means that any change in price is matched by an equal relative change in quantity. The coefficient of elasticity for this alternative is in the range of E = 1. A click of the [Unit Elastic] button reveals a unit elastic supply curve, which is a straight line extending from the origin.
- Relatively Inelastic: Relatively inelastic supply means a relatively large change in price is needed to induce a relatively small change in quantity supplied. The coefficient of elasticity for this alternative is in the range of 0 < E < 1. A click of the [Relatively In] button reveals a relatively inelastic supply curve, which is steep but not vertical and intersects the quantity axis. The focus of this supply curve is on a narrow range of quantities, that is, a large range of prices are associated with a small range of quantities. Large changes in price cause small changes in quantity supplied. Relatively inelastic supply for a good occurs when sellers are not able to easily switch resources among the production of other goods.
- Perfectly Inelastic: Perfectly inelastic supply means that quantity supplied is unaffected by any change in price. The coefficient of elasticity for this alternative is E = 0. A click of the [Perfectly In] button reveals a perfectly inelastic supply curve, which is vertical. The focus of this supply curve is on a fixed quantity (Qo), that is, an infinite range of prices is associated with the same quantity. It matters not what price does, it can change a little or it can change a lot, but the quantity DOES NOT change. It is fixed. Perfectly inelastic supply occurs when sellers have no ability to switch resources among the production of goods.
Intercept and ElasticityThe intersection of the supply curve with either the vertical price or horizontal quantity axis is an indication of the price elasticity of supply. An elastic supply curve intersects the vertical price axis. An inelastic supply curve intersects the horizontal quantity axis. A unit elastic supply curve intersects both axis simultaneously, that is, the origin. Why so?
The reason is that elasticity is the relative change in quantity supplied compared to price. If quantity and price both begin at zero and increase in constant proportions along a supply curve with a constant slope, then supply is unit elastic. However, if the price starts as a positive value with a zero quantity (which occurs if the supply curve intersects the vertical price axis), then constant proportional changes in price and quantity result in relatively larger changes in quantity than price, which is elastic. Alternatively, if the quantity starts as a positive value with a zero price (which occurs if the supply curve intersects the horizontal quantity axis), then constant proportional changes in price and quantity result in relatively larger changes in price than quantity, which is inelastic.
ELASTICITY ALTERNATIVES, SUPPLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 4, 2024].
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