Price Elasticity Of Supply

1. The law of supply states that higher price raise the volume supplied. The price elasticity of supply measures the amount of volume supplied reacts to variations in price.
1. Supply of a commodity is said to be elastic if the volume supplied reacts considerably to variations in price. Supply is said to be inelastic if the volume supplied reacts only a little to variation in prices.
1. The price elasticity of supply is based on the suppleness of vendors to variation the volume of the commodity they make. For instance, a beachfront land has an inelastic supply as it is approximately not feasible to make more of it.
1. Alternatively, manufactured commodities such as paper materials, automobiles, electronic and electrical commodities have elastic supplies as industries manufacture them and can operate their enterprises for a long time in reply to a higher price.
1. In almost all markets a key determinant of the price elasticity of supply is the time period being measured. Supply is normally more elastic in the long run than in the short run.
1. Over a little period of time, industries cannot easily vary the dimension of their enterprises as their factories to make more or less of a commodity.
1. Therefore, in the short run the volume supplied is not very receptive to the price. Alternatively over long periods industries can construct new enterprises or close the existing ones.
1. In addition, new industries can emerge into market and existing ones can wind up. Therefore, in the long run, the volume supplied can respond considerably to change in prices.

Calculating the Price Elasticity of Supply

Economists compute the price elasticity of supply as the percentage change in the volume supplied divided by the percentage change in the price and it is represented as,

Price elasticity of supply         =          Percentage change in volume supplied
Percentage change in price

Illustration

For instance, presume that a hike in the price of milk from \$10 to \$12 a gallon raises the amount that dairy farmers manufacture from 15000 to 20000 gallons per month.

By using midpoint method compute the percentage change in price.

Solution

Difference in price                  =          \$12 - \$10         =          \$2

Midpoint difference                =          \$11

Percentage change in price   =        Difference in Price                  *          100
Midpoint Difference

=          \$2                    *          100
\$11

=          18.2%

Likewise, to compute the percentage change in volume supplied,

Percentage change in volume supplied           =          Difference in Gallons  * 100
Midpoint Difference

Difference in Gallons              =          20000 – 15000            =          5000

Midpoint Difference               =          17500

=          5000    *          100
17500

=          28.6%

In this case, the price elasticity of supply is

=          28.6%              =          1.60
18.2%

The elasticity of 1.60 represents that the volume supplied moves proportionately twice as much as the price.

The Variety of Supply Curves

1. As the price elasticity of supply measures the receptiveness of volume supplied to the price, it is reproduced in the appearance of the supply curve. In the extreme case of null elasticity, supply is perfectly inelastic and supply curve is vertical.

2. In this case, the volume supplied is the same regardless of the price. As the elasticity hikes, the supply curve gets flatter which shows that the quantity supplied reacts more to changes in the price.

3. At the opposite extreme supply is perfectly elastic. This happens as the price elasticity of supply approaches infinity and the supply curve becomes horizontal which means that very meagre variations in the price tends to very large variations in the volume supplied.

4. In some markers, the elasticity of supply is not invariable but differs over the supply curve, an industry in which firms have factories with limited aptitude of manufacturing.

5. For low levels of volume supplied, the elasticity of supply is high depicting that industries react considerably to variations in prices.

6. In this region, industries have capability for manufacture that is not being used such as plants and equipment idle for all or a portion of in a day.

7. Small increases in price make it gainable for industries to commence idle capacity. As the volume supplied rises, industries start to arrive at capacity.

Once capacity is fully used increasing manufacture even more needs the construction of new plants. To encourage industries to acquire this additional layout the price must hike considerably so supply becomes less elastic

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