Economics Elasticity Of Supply Questions Long
Elastic supply refers to the degree of responsiveness of the quantity supplied of a good or service to changes in its price. In other words, it measures how much the quantity supplied changes in response to a change in price. When supply is elastic, a small change in price leads to a relatively larger change in quantity supplied, indicating that suppliers are highly responsive to price changes.
There are several factors that determine the elasticity of supply:
1. Availability of inputs: If inputs required for production are readily available, suppliers can easily increase or decrease production in response to price changes, resulting in a more elastic supply. Conversely, if inputs are scarce or difficult to obtain, supply becomes less elastic.
2. Time period: The elasticity of supply tends to be higher in the long run compared to the short run. In the short run, suppliers may have limited capacity to adjust production levels, while in the long run, they can make necessary adjustments to increase or decrease output more easily.
3. Spare production capacity: If suppliers have excess production capacity, they can quickly increase output without incurring significant additional costs, leading to a more elastic supply. On the other hand, if production capacity is fully utilized, it becomes more difficult to increase output, resulting in a less elastic supply.
4. Ability to store or stockpile goods: If suppliers can store or stockpile goods, they can adjust the quantity supplied based on price changes. This flexibility allows for a more elastic supply. However, if goods are perishable or cannot be stored, supply becomes less elastic.
5. Substitutability of inputs: If suppliers can easily switch between different inputs or production methods, they can respond more effectively to price changes, resulting in a more elastic supply. Conversely, if inputs are specialized or unique, supply becomes less elastic.
The elasticity of supply is measured using the price elasticity of supply (PES) formula, which is the percentage change in quantity supplied divided by the percentage change in price. A PES greater than 1 indicates elastic supply, while a PES less than 1 indicates inelastic supply.
Understanding the concept of elastic supply is crucial for both producers and consumers. For producers, knowing the elasticity of supply helps in making production decisions, setting prices, and predicting the impact of price changes on revenue. For consumers, understanding the elasticity of supply helps in understanding how changes in price may affect the availability of goods and services in the market.
In conclusion, elastic supply refers to the responsiveness of quantity supplied to changes in price. It depends on factors such as availability of inputs, time period, spare production capacity, ability to store goods, and substitutability of inputs. The concept of elastic supply is important for producers and consumers to make informed decisions and understand the dynamics of the market.