Economics Elasticity Of Supply Questions Long
The relationship between price and supply elasticity is inverse or negative. In other words, as the price of a good or service increases, the supply elasticity tends to decrease, and vice versa.
Supply elasticity refers to the responsiveness of the quantity supplied of a good or service to changes in its price. It measures the percentage change in quantity supplied divided by the percentage change in price. The formula for supply elasticity is:
Supply Elasticity = (% Change in Quantity Supplied) / (% Change in Price)
When the price of a good or service increases, suppliers have an incentive to produce and sell more of it, as they can earn higher profits. This leads to an increase in the quantity supplied. However, the extent to which suppliers can increase their production in response to a price change depends on various factors, such as the availability of inputs, production capacity, and time.
In the short run, when the price of a good or service increases, suppliers may not be able to significantly increase their production due to limited resources or production constraints. As a result, the percentage change in quantity supplied may be relatively small compared to the percentage change in price. This leads to a low supply elasticity.
On the other hand, in the long run, suppliers have more flexibility to adjust their production levels. They can invest in additional resources, expand their production capacity, or enter the market if they see potential profits. In this case, the percentage change in quantity supplied can be relatively larger compared to the percentage change in price, resulting in a higher supply elasticity.
Therefore, the relationship between price and supply elasticity is negative. As the price increases, the supply elasticity tends to decrease because suppliers may face limitations in increasing their production. Conversely, as the price decreases, the supply elasticity tends to increase as suppliers have more room to adjust their production levels.