4.8: elasticity of supply

• The elasticity of supply measures how responsive the quantity supplied of a good is to changes in its price.
• supply elasticity = % ∆ Quantity supplied / % ∆ price
• Understanding Supply Elasticity:

  • Positive Elasticity:
  • The supply curve is upward sloping, meaning as prices increase, the quantity supplied also increases. Therefore, the elasticity of supply is always positive.
• Elastic Supply: If supply is elastic, a small price increase leads to a large percentage increase in the quantity supplied. Elastic supply curves are relatively flat.
• Inelastic Supply: If supply is inelastic, a price increase leads to only a small increase in quantity supplied. Inelastic supply curves are relatively steep.
• Vertical supply curve: This indicates zero elasticity of supply. No matter how much the price increases, the quantity supplied does not change.
• Horizontal supply curve: This represents infinite supply elasticity. Any small price increase leads to an unlimited increase in quantity supplied.
• • The elasticity of supply for housing varies greatly between the short run and long run.
  • In the short run, supply is almost inelastic (vertical) because it takes time to build houses.
  • In the long run, housing supply becomes more elastic, meaning that housing markets can respond to price changes more flexibly.
• Own-Price Elasticity of Demand: Measures how quantity demanded changes when the price of the same good changes.
• Cross-Price Elasticity of Demand: Measures how the demand for one good changes when the price of a related good changes.
• Income Elasticity of Demand: Measures how demand changes when consumer income changes.
• Elasticity of Supply: Measures how quantity supplied changes in response to price changes.
• Supply elasticity reflects how quickly producers can adjust their output in response to price changes.
• • Highly elastic supply curves are flat, meaning producers can easily increase output when prices rise.
  • Inelastic supply curves are steep, meaning producers cannot easily increase output even if prices go up.
• price elasticity of supply measures the responsiveness of quantity supplied given a change in price
• PES = %∆Qs/%∆P
• PES is always positive due to law of supply
• PES > 1 supply is price elastic
• PES < 1 supply is price inelastic
• 0 supply is perfectly price inelastic
• if PES = infinity, perfectly price elastic
• If PES = 1 supply is unit price elastic
• Determinants of the PES:

  • production lag, the longer the production lag the more inelastic PES
  • stocks : larger the stocks the more elastic PES
  • spare capacity : the more spare capacity the more price elastic
  • substitutability of Factors of production: the more substitutable the more price elastic it is
  • Time: long run price elastic, short run price elastic (land & capital can't be varied in short run)