Price Elasticity of Supply

The Law of Supply states that, with other factors being constant, the quantity supplied increases with a price increase and decreases with a decrease in the price of the commodity. The degree of change in quantity supplied in response to changes in price is known as Price Elasticity of Supply. Price Elasticity of supply undertakes how the supply of a particular product responds to price fluctuations. The degree of change in supply due to changes in price is depicted by calculating the Price Elasticity of Supply.

What is Price Elasticity of Supply?

Price Elasticity shows how the quantity supplied behaves in response to changes in the price of the commodity. It measures the degree of responsiveness of the quantity supplied to the change in price. Price Elasticity of supply undertakes how the supply of a particular product responds to price fluctuations. Price Elasticity is generally depicted as E_S_.During the calculation of the elasticity of supply, the percentage change in price and the percentage change in quantity supplied are the two factors that need to be considered.

E_S = $\frac{Percentage~change~in~Quantity~Supplied}{Percentage~change~in~Price}$

Types of Elasticity of Supply

1. Perfectly Elastic Supply: Price Elasticity of Supply is said to be perfect elastic supply when at a particular price, there is infinite supply for a commodity, and with even a small change in its price, the supply becomes zero. Perfectly Elastic Supply indicates that the suppliers are willing to sell only when the prices of commodities are high. The price elasticity in this case is infinite; i.e., E_S= ∞.

2. More than Unit Elastic Supply/Relatively elastic supply: Price Elasticity of Supply is said to be more than unit elasticity when the percentage change in supply is relatively greater than the percentage change in price. The price elasticity of supply in such cases is greater than 1; i.e., E_S> 1.

3. Unit Elastic Supply: Price Elasticity of Supply is said to be Unit Elastic Supply when a price change is exactly equal to the change in quantity supplied. The price elasticity of supply is 1 in such cases; i.e., E_S= 1.

4. Less than Unit Elastic Supply/Relatively Inelastic Supply: Price Elasticity of Supply is said to be less than unit elastic supply when the percentage change in supply is relatively lower than the percentage change in price. Price Elasticity of Supply is less than 1 in such cases; i.e., E_S< 1.

5. Perfectly Inelastic Supply: Price Elasticity of Supply is said to be perfect inelastic supply when the quantity supplied does not change with the change in price. It shows that the supply would remain the same irrespective of the price. The price elasticity in this case is zero; i.e., E_S= 0.

Determinants of Price Elasticity of Supply

1. Flexibility in Production: If the producers can quickly and easily adjust their production levels in response to changes in prices, the supply is more elastic. For example, industries with excess production capacity can increase overall production without any significant change in the cost of production, in such cases, supply is more elastic.

2. Period: The elasticity of supply often increases over time. In the short run, producers may find it difficult to change their production level due to fixed factors of production like machinery, plant, etc. In the long run, these factors become more adjustable, and the overall production can be increased by increasing all the factors of production.

3. Availability of Inputs: If the necessary inputs for production are readily available and can be easily acquired, producers may be more likely to respond to price changes by adjusting their supply. If the inputs are scarce or require time to obtain, the supply becomes less elastic.

4. Government Intervention: Regulations, taxes, and subsidies can impact the elasticity of supply. Heavy regulations or taxes might limit the ability of producers to respond to price changes, making supply less elastic. Subsidies, on the other hand, make the supply more elastic.

5. Type of Product: Sellers need to see what type of products they do business in, mainly perishable, and/or non-perishable. Perishable items have a low shelf life, and buyers can wait for a little time so that sellers can lower their prices to sell perishable products before they die.

6. Natural Constraints: The elasticity of supply is also influenced by the natural constraints in the production of a commodity. For example, If we wish to produce more teak wood, it will take years of plantation before it becomes usable. Supply of teak wood will therefore be less elastic.

7. Technique of Production: Supply will be less elastic in case the production of a commodity involves the use of a complex and expensive technology. On the other hand, the use of simple technology facilitates quicker changes in output and supply.

Methods of Measuring Price Elasticity of Supply

I. Proportionate Method/Percentage Method:

In the percentage method of calculation of price elasticity of supply, percentage change in quantity supplied and percentage change in prices are considered. In this,

E_S = $\frac{Percenatge~change~in~Quantity~Supplied}{Percentage~change~in~Price}$

Where,

Percentage change in Quantity Supplied = $\frac{Change~in~Quantity~Supplied}{Initial~Quantity}\times{100}$

Change in Quantity Supplied (ΔQ) = New Quantity (Q₁) – Initial Quantity (Q)

Percentage change in prices = $\frac{Change~in~Price}{Initial~Price}\times{100}$

Change in price (ΔP) = New Price (P₁) – Initial Price (P)

Further, we can covert these formulas in a proportionate manner as:

E_S = $\frac{\frac{\Delta Q}{Q}\times{100}}{\frac{\Delta P}{P}\times{100}}$

Where,

ΔQ is the change in quantity supplied, ΔP is the change in prices, Q is the initial quantity supplied, Q₁ is the new quantity supplied, P is the initial price, and P₁is the new price.

Example:

Suppose, at the price of ₹20 per unit, a firm supplies 100 units of a commodity. When the prices rise to ₹24, the firm increases the supply to 140 units. Here, Price Elasticity will be calculated as:

Change in quantity supplied (ΔQ) = New Quantity (Q₁) – Initial Quantity (Q)

ΔQ = 140 – 100 = 40

Change in price (ΔP) = New Price (P₁) – Initial Price (P)

ΔP = 24 – 20 = 4

E_S = $\frac{\frac{\Delta Q}{Q}\times{100}}{\frac{\Delta P}{P}\times{100}}$

= $\frac{\frac{140-100}{100}\times{100}}{\frac{24-20}{20}\times{100}}$

E_S = 2

As E_S> 1, the Elasticity of Supply for the given commodity is more than unit elastic.

II. Geometric Method/Arc Method/Point Method:

Geometric Method, also known as Arc Method or Point Method, is another way to determine the elasticity of supply. Under this method, elasticity is calculated from the graphical representation of supply. The formula for calculating the elasticity remains the same as in the Percentage method; i.e.,

$E_s=\frac{\frac{\Delta Q}{Q}\times{100}}{\frac{\Delta P}{P}\times{100}}$

In the geometric method of elasticity of supply, three cases are studied, namely Highly Elastic Supply, Unitary Elastic Supply, and Less Elastic Supply.

1. Highly Elastic Supply (E_S > 1):

Highly Elastic Supply (Geometric Method)

In the above graphical representation of a highly elastic supply, the supply curve SS passed through the Y-axis and meets the X-axis at L. Here, as LQ is greater than OQ, the elasticity of supply at point A is greater than 1, showing high supply elasticity. Thus, the elasticity of supply will be,

$E_S=\frac{LQ}{OQ}>1 ” height=”38″ width=”153″>, where LQ > OQ 2. Unitary Elastic Supply (ES = 1): <figure class=$ Unitary Elastic Supply (Geometric Method)

In the above graphical representation of unitary elastic supply, the supply curve SS passed through the origin and meets the X-axis at O. Here, the elasticity of supply will be,

3. Less Elastic Supply (E_S < 1):

In the above graphical representation of less elastic supply, the supply curve SS meets the X-axis at some point on the X-axis, say L. Here, as LQ is less than OQ, the elasticity of supply at point A will be less than 1, showing less supply elasticity. Thus, the elasticity of supply will be,

$E_S=\frac{LQ}{OQ}<1$ , where LQ < OQ