Elasticity of Supply: Determinants, Measurements, Nature and Applications | Economics for JAMB PDF Download

Introduction

• Elasticity of supply measures the responsiveness of the quantity supplied to changes in price.
• It helps us understand how producers adjust their output in response to price changes.

Determinants of Supply Elasticity

1. Availability of Inputs

• The more readily available inputs are, the easier it is for producers to increase their output, making supply more elastic.
• Conversely, if inputs are scarce or difficult to obtain, supply becomes less elastic.

2. Time Horizon

• In the short run, it may be challenging for producers to adjust their output levels due to fixed factors of production, resulting in inelastic supply.
• In the long run, producers can modify their production processes and adjust inputs, leading to a more elastic supply.

3. Production Flexibility

• Producers with more flexibility in their production processes can easily change output levels in response to price changes, making supply more elastic.
• Industries with specialized or inflexible production methods tend to have less elastic supply.

4. Storage Capacity

• Producers with ample storage capacity can store excess inventory during periods of low demand and release it when prices rise, resulting in more elastic supply.
• Limited storage capacity restricts the ability to adjust supply, making it less elastic.

Nature of Elasticity

1. Perfectly Elastic Supply

• A perfectly elastic supply occurs when a slight change in price leads to an infinite change in quantity supplied.
• This situation arises when producers can easily and immediately adjust their output without any cost constraints.

2. Perfectly Inelastic Supply

• A perfectly inelastic supply occurs when a change in price has no effect on the quantity supplied.
• This occurs when the quantity supplied remains constant regardless of price changes.

3. Relatively Elastic Supply

• A relatively elastic supply exists when a change in price results in a proportional change in quantity supplied.
• Producers can adjust their output, but not to the same extent as in perfectly elastic supply.

4. Relatively Inelastic Supply

• A relatively inelastic supply occurs when a change in price leads to a proportionally smaller change in quantity supplied.
• Producers find it difficult to adjust their output levels due to limited resources or production constraints.

Measurement of Elasticity

1. Price Elasticity of Supply (PES)

• PES measures the responsiveness of quantity supplied to changes in price.
• PES is calculated as the percentage change in quantity supplied divided by the percentage change in price.
  PES = (% Change in Quantity Supplied) / (% Change in Price)

Interpreting Elasticity Coefficients in Real-Life Situations

1. Unitary Elasticity (PES = 1)

• A PES value of 1 indicates that the percentage change in quantity supplied is equal to the percentage change in price.
• Suppliers are adjusting their output in response to price changes, maintaining a constant elasticity of supply.

2. Perfectly Elastic Supply (PES = ∞)

• A PES value of infinity means that a small change in price leads to an infinite change in quantity supplied.
• Suppliers can easily adjust their output without any cost constraints, resulting in a perfectly elastic supply.

3. Perfectly Inelastic Supply (PES = 0)

• A PES value of zero indicates that a change in price has no effect on the quantity supplied.
• Suppliers cannot adjust their output levels, leading to a perfectly inelastic supply.

4. Relatively Elastic Supply (PES > 1)

• PES greater than 1 indicates that quantity supplied is more responsive to changes in price.
• Suppliers can adjust their output, but the change in quantity supplied is proportionally greater than the change in price.

5. Relatively Inelastic Supply (PES < 1)

• PES less than 1 suggests that quantity supplied is less responsive to changes in price.
• Suppliers find it difficult to adjust their output, resulting in a proportionally smaller change in quantity supplied compared to the change in price.

Applications of Elasticity of Supply

1. Production Planning

• Understanding supply elasticity helps firms determine the feasibility of increasing or decreasing production levels based on price changes.
• Firms with elastic supply can respond quickly to changes in market conditions, while those with inelastic supply need to plan more cautiously.

2. Pricing Strategies

• Elasticity of supply helps businesses set optimal prices.
• If supply is elastic, firms can lower prices to increase market share, whereas inelastic supply allows for higher prices without sacrificing quantity supplied.

3. Government Policies

• Governments consider supply elasticity when designing policies related to taxation, subsidies, and regulations.
• Elastic supply industries may face higher tax rates or stricter regulations to generate government revenue or ensure consumer protection.

Conclusion

• Elasticity of supply is crucial for understanding how producers respond to price changes.
• Determinants such as input availability, time horizon, production flexibility, and storage capacity influence the nature of supply elasticity.
• Measuring elasticity using the price elasticity of supply coefficient helps interpret the responsiveness of quantity supplied to price changes.
• Understanding elasticity of supply has practical applications in production planning, pricing strategies, and government policy-making.