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Elasticity of Supply

The elasticity of supply measures the responsiveness of quantity supplied to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply can be elastic, meaning a small change in price leads to a large change in quantity, or inelastic, where a large price change results in a small quantity change. For example, land supply is generally inelastic while software supply is almost perfectly elastic since distribution costs are low.

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68 views2 pages

Elasticity of Supply

The elasticity of supply measures the responsiveness of quantity supplied to changes in price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. Supply can be elastic, meaning a small change in price leads to a large change in quantity, or inelastic, where a large price change results in a small quantity change. For example, land supply is generally inelastic while software supply is almost perfectly elastic since distribution costs are low.

Uploaded by

Hussnain Shah
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Elasticity of supply

Suppliers make a profit by selling goods and services at higher prices than their cost to produce. How much of a profit suppliers make is determined by the cost of the factors of production to produce the product and on the suppliers' efficiency in producing the product. Since higher prices make it easier to earn a profit, and since the amount of profit is also dependent on the quantity sold, if increased demand raises prices, then suppliers will respond by increasing their supply, since that will allow them to earn a higher profit. Of course, this is merely the law of supply, but it does not state how much supply will change when prices change. The elasticity of supply measures the percentage change in the quantity of supply compared to the percentage change in a supply determinant. Although the elasticity of supply can be measured against several supply determinants, the most important is the price. The price elasticity of supply measures the percentage change in supply quantity compared to the percentage change in the price. PercentageChange in Quantity supply Price Elasticity of Supply = Percentage Change in Price As the case of demand, supply can also be elastic and inelastic. For example, the supply of land is generally inelastic. By contrast, the supply of software is almost perfectly elastic since it costs very little to make and distribute copies of software.

Applications of elasticity
The concept of elasticity has an extraordinarily wide range of applications in economics. In particular, an understanding of elasticity is fundamental in understanding the response of supply and demand in a market. Some common uses of elasticity include:

Effect of changing price on firm revenue. Analysis of incidence of the tax burden and other government policies. Income elasticity of demand can be used as an indicator of industry health, future consumption patterns and as a guide to firms investment decisions. Effect of international trade and terms of trade effects. Analysis of consumption and saving behavior. Analysis of advertising on consumer demand for particular goods.

Whats the difference between Normal Goods and Inferior Goods?


Inferior Good: An inferior good means an increase in income causes a fall in demand. If consumption level goes down with the increase in income, goods are categorized as inferior goods. An example, of an inferior good is Tesco value bread. When your income rises you buy less Tesco value bread and more high quality, organic bread.

Normal Good. This means an increase in income causes an increase in demand. If consumption levels of goods go up with the rise in income levels, they are grouped as normal goods when your income increases you buy more clothes.

Difference between substitute and complementary goods:


Complementary Goods. Goods which are used together, e.g. TV and DVD player or can be the goods which complete each other. For example car and petrol, bat and ball for playing cricket. Substitute Goods. Goods which are alternatives, one can be used in place of other, e.g. Pepsi and coca-cola, tea and coffee.

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