Price Elasticity of Supply

According to the law of supply, quantity supplied increases as price decreases. The law of supply demonstrates how the quantity supplied will change as a result of changes in the factors that affect supply, including changes in production costs, the time factor, the nature of the good, the accessibility of facilities for increasing output, etc. However, this law does not specify what proportion or percentage change in the supply determinants causes what proportion or percentage change in the quantity supply. Elasticity of supply was thus developed to quantify the proportionate or percentage variation in the quantity delivered together with its factors.

The degree of the link between supply factors and quantity delivered is determined by the elasticity of the supply. The ratio of the percentage change in the quantity supplied to the percentage change in its determinant of supply is generally known as the elasticity of supply.

Mathematically,

Ed = %change in quantity supplied/ % change in any one quantitative determinant of supply

Price Elasticity of Supply

The relationship between the percentage or proportionate change in the quantity supplied and the percentage or proportionate change in price is known as price elasticity of supply. In other words, the proportionate change in amount supplied divided by the proportionate change in price is the price elasticity of supply.

The degree to which the quantity supplied for a given item responds to changes in price is measured by the price elasticity of supply. In other words, the ratio of the percentage change in the amount supplied to the percentage change in price is the definition of price elasticity of supply. The following is how it can be mathematically expressed:

Price elasticity of supply (ep) = Percentage change in quantity of supply / Percentage change in price

Where, ep = Coefficient of price elasticity of supply.

Because the price and quantity supplied have an inverse relationship, the price elasticity of supply is always positive.

Numerical example:

The price of rice rises from Rs.40/kg to Rs.50/kg. Due to rise in price of rice its supply increases from 450kg to 500kg. Find the price elasticity of supply for rice.

Here,

Initial quantity supply (Q) = 450kg

Final quantity supply = 500kg

Change in quantity supply (∆Q)= 500-450= 50kg

Initial Price (P) = Rs.40

Final price = Rs.50

Change in price (∆P) = 50-40= Rs.10

Ep =( ∆Q/∆P)×(P/Q)

= (50/10)×(40/450)

= 0.4

Types of Price Elasticity of Supply

There are five different types of supply-side price elasticity. These are what they are:

• Perfectly Inelastic Supply (ep = 0): It is said to be a fully inelastic supply if there is no change in the quantity supplied as a result of the price change. Simply put, the supply is said to be totally inelastic when it remains constant despite changes in price. For instance: If the price changes from Rs. 18 to Rs. 20, or from Rs. 20 to Rs. 18, the quantity of the product delivered to the society—1000 kg—remains same.

• Relatively Inelastic Supply (ep < 1): It is considered to have a relatively inelastic supply when the percentage or proportionate change in the amount provided of a given commodity is smaller than the percentage or proportionate change in the price. For instance: The amount given drops from 800 kg to 790 kg as a result of the product's price drop from Rs. 50 to Rs. 40 per kg. The amount given falls from 740 kg to 800 kg as a result of the rise in price of noodles from Rs. 10 to Rs. 20 per unit.

• Unitary Elastic Supply (ep = 1): A commodity's supply is said to be unitary elastic when the percentage or proportional change in the quantity supplied equals the percentage or proportionate change in price. For instance: The quantity delivered lowers from 200 units to 100 units as a result of a decrease in pricing for Good A from Rs. 100 to Rs. 50 per unit. The amount of X commodities supplied decreases by 10% when their price decreases by 10%.

• Relatively Elastic Supply (ep > 1): A commodity's supply is said to be relatively elastic when the percentage or proportionate change in the quantity supplied is larger or more than the percentage or proportionate change in price. For instance: The amount given reduces from 1000 units to 500 units as a result of a decrease in the price of X from Rs.10000 to Rs.8000 per unit. The amount supplied rises from 500 units to 800 units as a result of an increase in the price of Y from Rs. 900 to Rs. 1000 per unit.

• Perfectly Elastic Supply (ep = ∞): The supply of a commodity is said to be fully elastic if a minor change in price (i.e., rise or fall) results in infinity in supply or zero in supply. If a little change in price would result in an infinite change in the amount supplied, the supply of that commodity is said to be fully elastic. No change in price, observably, results in an endless change in supply. It is an excellent hypothetical idea. A modest increase in the price of y goods from Rs.99 to Rs.100, for instance, causes the quantity provided to increase from 200 units to infinity.

Determinants of Price Elasticity of Supply

The following are the main factors that determine a commodity's supply price elasticity with respect to its own price:

• The change in cost that businesses experience when they raise the volume of their output determines the supply's elasticity.
• The length of time is a significant supply factor as well. In general, long-term supply elasticity is expected to be stronger than short-term supply elasticity.
• Commodity nature plays a significant role in determining supply elasticity. Durable items are available in a somewhat elastic supply. Perishable goods' supply is substantially less elastic since it cannot be drastically altered in reaction to price fluctuations.
• The availability of production facilities determines how the producers will react to a change in price.

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan