ELASTICITY OF SUPPLY: RATES, FACTORS AND CALCULATION - ECONOMY - 2025

The elasticity of supply is an indicator used in economics to express the responsiveness or flexibility of the quantity supplied of a product or service in the face of a change in its price. A business needs to know how quickly and effectively it can respond to changing market conditions, especially price changes.

Elasticity is represented in numerical form and is defined as the percentage change in the quantity offered, divided by the percentage change in price. It is desirable for a company to be highly receptive to variations in price and other market conditions.

A high elasticity of supply makes the company more competitive than its rivals and allows the company to generate more revenue and profit.

In the short term, the quantity of products offered may be different from the quantity manufactured, because companies have inventories that they can accumulate or consume.

Types

Product supply can be described as inelastic when the coefficient is less than one; It is difficult for companies to change production in a given period of time. For example, the supply of hotel rooms is inelastic.

On the other hand, supply can be described as elastic when the coefficient is greater than one; companies can easily increase production without increasing cost or time delays. The supply of books is elastic.

For any given supply curve, the elasticity of supply is likely to vary throughout the curve. There are three extreme cases of elasticity of supply.

Perfectly elastic

A near zero percent change in price produces a very large percent change in quantity supplied.

Perfectly inelastic

Only one quantity can be bid, regardless of price. An elasticity of zero indicates that the quantity offered does not respond to a price change, the quantity supplied is fixed. The supply of beachfront land lots is perfectly inelastic.

Unit elasticity

The percentage change in the quantity being offered equals the percentage change in the price. The supply of fish has unit elasticity.

Graphically, it is shown as a linear curve that starts from the origin:

Influential factors

Production complexity

The elasticity of supply is highly dependent on the complexity of the production process. For example, textile production is relatively simple.

The workforce is largely unskilled and no special structures such as production facilities are needed. Therefore, the elasticity of supply for textiles is high.

On the other hand, the elasticity of supply for certain types of motor vehicles is relatively low.

Its manufacture is a multi-stage process that requires specialized equipment, skilled labor, a large network of suppliers, and large research and development costs.

Mobility of production components

If the components associated with the production (labor, machines, capital, etc.) of a company that manufactures a product are readily available and the company can change its resources to put them to manufacture another required product, then it can be said that its elasticity of supply is high.

If the opposite applies, then its elasticity is low. For example, a printer that can easily switch from printing magazines to greeting cards has an elastic bid.

Response time

Supply is normally more elastic in the long term than in the short term for the goods produced.

It is assumed that in the long term all components of production can be used to increase supply. In the short term, only labor can be increased, and even then changes can be prohibitively expensive.

For example, a cotton farmer cannot respond in the short term to an increase in the price of soybeans, due to the time it would take to obtain the necessary land.

In contrast, the milk supply is elastic due to the short period of time from when the cows produce the milk until the products reach the market.

Inventory availability

If stocks of raw materials and finished products are at a high level, then a company can respond to a change in price: its supply will be elastic.

Conversely, when stocks are low, declining supplies forces prices to rise due to shortages.

Additional production capacity

A producer with unused capacity can respond quickly to price changes in the market, assuming production components are readily available.

Surplus capacity within a company is indicative of a more proportional response in quantity supplied to changes in price, suggesting an elasticity of supply. Indicates that the producer could respond appropriately to price changes to match the supply.

The greater the additional production capacity, the faster companies can respond to price changes. Therefore, the more elastic the offer, the better the product or service.

The supply of products and services is most elastic during a recession, when a large amount of labor and capital resources are available.

How is it calculated?

Various research methods are used to calculate supply elasticities in real life, including analysis of historical sales data and the use of customer preference surveys, to build test markets capable of modeling the elasticity of such changes.

Alternatively, a conjoint analysis can be used, classifying the preferences of the users and then being able to analyze them statistically.

The following equation calculates the Elasticity of Supply (EO):

Percentage Change in Quantity Offered / Percentage Change in Price

The Percentage Change in Quantity Offered (CPCO) is calculated as:

((Quantity supplied2 - quantity supplied1) / quantity supplied1) x 100

In the same way, the Percentage Change in Price (CPP) is calculated:

((Price2 - price1) / price1) x 100

Example

The market price of a firm increases from $ 1 to $ 1.10, thereby increasing its quantity supplied from 10,000 to 12,500.

Applying the above formulas, the elasticity of supply is:

CPCO = ((12,500 - 10,000) / 10,000) x 100 = +25

CPP = ((1,1 - 1) / 1) x 100 = +10

EO = +25 / + 10 = +2.5

The positive sign reflects the fact that the increase in prices will act as an incentive to offer more. Because the coefficient is greater than one, the supply is elastic, the company responding to price changes. This will give you a competitive advantage over your rivals.

References

1. Wikipedia, the free encyclopedia (2018). Price elasticity of supply. Taken from: en.wikipedia.org.
2. Economics Online (2018). Price elasticity of supply. Taken from: economicsonline.co.uk.
3. Geoff Riley (2018). Explaining Price Elasticity of Supply. Taken from: tutor2u.net.
4. Tejvan Pettinge (2016). Price Elasticity of Supply. Economics Help. Taken from: economicshelp.org.
5. Earle C. Traynham (2018). Chapter 5, Elasticities of Demand and Supply. University of North Florida. Taken from: unf.edu.