Lec 18 Elasticity of Supply

Elasticity of Supply
The elasticity of supply can be defined as “the degree (measure) of responsiveness in quantity supplied to a change in price”.
It is also defined as the percentage change in quantity supplied divided by percentage change in price.
It represents the rate of change in quantity supplied due to a change in its own price.
Elasticity of supply can be defined as “the degree (measure) of responsiveness in quantity supplied to a change in price”.
It is also defined as the percentage change in quantity supplied divided by percentage change in price.
It represents the rate of change in quantity supplied due to a change in it’s own price.

1. Elasticity of Supply Unit 18 Instructor: Atta Hussain Syed

2. 1.ELASTICITY OF SUPPLY The law of supply indicates the direction of change—if price goes up, supply will increase. But how much supply will rise in response to an increase in price cannot be known from the law of supply. To quantify such change we require the concept of elasticity of supply that measures the extent of quantities supplied in response to a change in price.

3. 1.ELASTICITY OF SUPPLY Elasticity of supply can be defined as “the degree (measure) of responsiveness in quantity supplied to a change in price”. It is also defined as the percentage change in quantity supplied divided by percentage change in price. It represents the rate of change in quantity supplied due to a change in it’s own price.

4. It can be calculated by using the following formula: E S  = % change in quantity supplied/% change in price Symbolically, E S  = ∆Q/Q ÷ ∆P/P = ∆Q/∆P × P/Q ΔQ = The change in quantity supplied Q = The quantity supplied ΔQ = The change in price P = The price

5. Calculating Price Elasticities of Supply Step 1.  Use price elasticity of demand formula Step 2.  From the midpoint formula we know:

6. Step 3.  Use the values provided in the in each equation: Step 4.  Then, those values can be used to determine the price elasticity of demand : Calculating Price Elasticities of Supply

7. Given percentage change in price =10 percent Q =200 units ; Q 1 ​=225 units ; Δ Q = Q 1 ​− Q =225−200)=25 units Percentage change in quantity supplied =  Price elasticity of supply  ​ Price elasticity of supply =1.25 Example: A 10 percent rise in the price of a commodity raises its supply from 200 units to 225 units. Calculate its price elasticity of supply.   Percentage change in quantity supplied Percentage change in price E s ​= = 12.5 % 10 % 12.5 % 10 % = 1.25 =

8. 2. TYPES ELASTICITY OF SUPPLY

9. 1. ELASTIC SUPPLY (E S >1) Supply is said to be elastic when a given percentage change in price leads to a larger change in quantity supplied. Under this situation, the numerical value of Es will be greater than one but less than infinity. A supply curve is said to be elastic when an increase in price increases the quantity supplied a lot ( and vice versa)

10. Supply is said to be inelastic when a given percentage change in price causes a smaller change in quantity supplied. Here the numerical value of elasticity of supply is greater than zero but less than one. When the same increase in price increases quantity supplied just a little , then the supply curve is said to be inelastic. 2 . INELASTIC SUPPLY (E S <1)

11. GRAPH REPRESENTATION OF INELASTIC AND ELASTIC SUPPLY

12. GRAPH REPRESENTATION OF INELASTIC AND ELASTIC SUPPLY

13. GRAPH REPRESENTATION OF INELASTIC AND ELASTIC SUPPLY

14. If price and quantity supplied change by the same magnitude , then we have unit elasticity of supply . Any straight line supply Curve passing through the origin, has an elasticity of supply equal to 1. e.g. if price rises by 10% and supply expands by 10%. 3. UNIT ELASTICITY OF SUPPLY (E s = 1)

15. Δ Q =1 Because % Δ Q =% Δ P Δ P Quantity (Q) Price (P) P P-1 S Q Q1 3. UNIT ELASTICITY OF SUPPLY (E s = 1)

16. The numerical value of elasticity of supply, in exceptional cases, may reach up to infinity. The supply curve PS1 (drawn in graph on next slide) has an elasticity of supply equal to infinity . Here the supply curve has been drawn parallel to the horizontal axis. The economic inter­pretation of this supply curve is that an unlimited quantity will be offered for sale at the price OS. If price slightly drops down below OS, nothing will be supplied. 4. PERFECTLY ELASTIC SUPPLY (ES = ∞)

17. Fir ms supply any amount at a price Quantity Price P S 1 E s =∞ 4. PERFECTLY ELASTIC SUPPLY (ES = ∞)

18. This describes that whatever the price of the commodity, it may even be zero, quantity supplied remains unchanged at OQ. This sort of supply curve is conceived when we consider the supply curve of land from the viewpoint of a country, or the world as a whole. In such a case, the Supply is perfectly inelastic or E d = 0 5. PERFECTLY INELASTIC SUPPLY (ZERO ELASTICITY)

19. No effect on supply following a change in price Quantity Price Q S 1 E s =0 5. PERFECTLY INELASTIC SUPPLY (ZERO ELASTICITY)

20. For example: the supply of exclusive items, like the painting of Mona Lisa, falls into this category. Whatever might be the price on offer, there is n way we can increase its supply.

21. The elasticity of supply is not same for all commodities. It may high or low depending upon number of factor. Following factors influence elasticity of supply. Nature of the Good Change in Per-Unit Costs with Increased Production Time Horizon Share of Market for Inputs Geographic Scope Determinants of Elasticity of Supply

22. The more easily the factors can be transferred from the production of one good to that of another, the greater will be the elasticity of supply. Since durable goods can be stored for a long time, its elasticity of supply is very high . But for non-durable goods and perishable goods elasticity of supply tends to be very low. The Nature of the Good

23. The main determinant of the elasticity of supply is how quickly per-unit costs increase with an increase in production. If increased production requires much higher cost, then the supply curve will be inelastic . If production can increase with constant costs then the supply curve will be elastic . Leonardo da Vinci paintings and pencil. Which has an inelastic supply and which an elastic supply? Why? 2. Change in Per-Unit Costs with Increased Production

24. 3. Time Horizon The time horizon influences the elasticity of supply for goods. Immediately following a price increase, producers can expand output only using their current capacity (making supply inelastic ) Over time, however, producers can expand their capacity (making supply elastic ) In agriculture, production plans have to be made months or even years ahead and they cannot be altered quickly. Manufacturing industries, on the other hand, can usually adjust their output upwards or downwards fairly quickly in response to changing conditions in the market.

25. Use of latest technology decreases the cost of production and increases the production capacity which increases supply of goods. 4. State of Technology

26. The geographic scope of the market determines the elasticity of supply for a good. The narrower the scope of the market of a good, the more elastic its supply. The wider the scope of the market of a good, the less elastic its supply. 5. Geographic Scope

27. Supply depends upon the below said factors. These factors should not arise if they arise; they affect the supply directly or indirectly. Whether conditions Floods Wars Epidemics (unexpected situations) 6. Factors Outside the Economic Sphere