ECONOMICS- Elasticity of Supply

Supply

Supply is defined as the quantity of a product that producers are able and willing to make available for sale at a certain price during a specific period of time under assumption that other things remain constant.

Supply is not only made by manufacturers of goods but also by owners of resources (such as land, labor etc.). From the perspective of resource suppliers, supply can be defined as the quantity of resources that resource owners are able and willing to supply during a period at a specific price, provided that other things remain constant.

To constitute supply, both the willingness and the ability to make supply must be present. Thus if a producer is willing to make 3,000 units of a product available for sale each day but his production capacity is only 1,000 units per day, his supply will be 1,000 units instead of 3,000 units.

Economists usually present supply information as a series of supply levels at various prices in table called supply schedule. Supply schedule when plotted produces a curve shaped graph called supply curve.

Example

The following table shows the quantity of t-shirts supplied by a hypothetical producer B at various prices during a year.

Price
Per Shirt
Number of
Shirts Supplied
$10 50
$20 75
$30 110
$40 160
$50 250

The above data shows that A supply of t-shirts is 50 units at a price of $10 per unit, 75 units at a price of $20 per unit and so on. We can also notice that the annual supply increases as the unit price increases. This is according to well know microeconomic law called law of supply.

Price Elasticity of Supply

 

Price elasticity of supply (PES) is the measure of responsiveness of producers and resource suppliers to the change in price of a produce or resource. The responsiveness of suppliers to price means the degree to which they change their supply when the price of a product, service or a resource changes by a certain amount. When suppliers are more responsive, they will change the quantity they supply by a greater amount in response to a small change in price.

A simple formula to calculate price elasticity of supply Es is:

Price Elasticity of Supply Es
= Percentage Change in Quantity Supplied
Percentage Change in Price

When using the above formula, the percentage changes in price and quantity supplied are calculated by dividing the difference of initial price/quantity by the difference of final price/quantity respectively. But this causes problem. For example, when price changes from $4 to $5 the percentage change in price is $1/$5 = 20% but in case of opposite change from $5 to $4, the percentage change is -$1/4 = -25%. The same problem arises when calculating the percentage change in quantity supplied. Thus the price elasticity of supply as calculated above is different for two opposite and equal changes.

We can avoid the above problem by using a more accurate formula called the mid-point formula of price elasticity given below:

Es = Change in Quantity Supplied ÷ Change in Price
(Qi + Qf) ÷ 2 (Pi + Pf) ÷ 2

Where Qi is the initial quantity supplied, Qf is final quantity supplied, Pi is the initial price and Pf is the final price.

The price elasticity of supply equals the slope of supply curve. Since the supply curve has positive slope therefore the price elasticity of supply is always positive. Remember that price elasticity of demand is negative.

Example

Calculate the price elasticity of supply using the mid-point formula when the price changes from $5 to $6 and the quantity supplied changes from 20 units per supplier per week to 30 units per supplier per week.

Solution

Percentage change in quantity supplied = (30 − 20) ÷ {(30 + 20) ÷ 2} = 40%

Percentage change in price = ($6 − $5) ÷ {($6 + $5) ÷ 2} ≈ 18%

Price elasticity of supply ≈ 40% ÷ 18% = 2.22

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