5.2 The Elasticity of Supply

5.2 a. The Price Elasticity of Supply and Its Determinants

The price elasticity of supply is the measure of the responsiveness in quantity supplied to a change in price for a specific good. ^[18]

Determinants of Price Elasticity: ^[18]

1. Easy to increase the number of producers
2. Easy to increase production if the demand increases
3. If production of goods can be varied, supply is more elastic
4. Goods can be stored easily
5. Quick production responds to a price increase easier
6. When a firm invests in capital, the supply is more elastic in responding to price increases
7. When moving resources to the industry is easier, the supply curve is more elastic
8. If costs rise slowly it will stimulate an increase in quantity supplies.

Example: The supply of quantity of gas would not fall in response to a rise in fuel prices.

^{Elasticity of Supply [19]}

5.2 b. Computing the Price Elasticity of Supply

Elasticity = (Percentage Change in Quantity )/(Percentage Change in Price) _[18]

Example: Assume if pizza prices rise by 40%, the quantity supplied rises by 26%. The elasticity of supply is = 26%/40% = 0.65

^{Elasticity of Supply [19]}

5.2 c. The Variety of Supply Curves

Elastic: An increase in price for an elastic good has a noticeable impact on consumption. Elasticity >1 ^[18]

Example: Movie tickets which is not a necessity and there are other competitors.

Inelastic: A shift in price does not drastically impact consumer demand or the overall supply of the good. Elasticity < 1 ^[18]

Example: Electricity.

Perfectly Elastic: The supply curve is horizontal; there is extreme change in demand in response to very small change in prices. Elasticity = ∞ ^[18]

Perfectly Inelastic: The supply curve is vertical; there is no response of demand to prices. Elasticity = 0 ^[18]

^{Types of Elasticity of Supply [20]}