Economics Elasticity Of Supply Questions Medium
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. This means that when the price of a product rises, suppliers are less responsive or less willing to increase the quantity supplied. On the other hand, when the price decreases, suppliers are more responsive or more willing to increase the quantity supplied.
This inverse relationship is due to the behavior of producers in response to changes in price. When prices are high, suppliers have a greater incentive to produce and sell more of a product, as it becomes more profitable. However, as prices decrease, the profit margins for suppliers also decrease, leading to a decrease in their willingness or ability to supply larger quantities.
The degree of responsiveness of supply to changes in price is measured by the concept of supply elasticity. Supply elasticity is calculated by dividing the percentage change in quantity supplied by the percentage change in price. A higher supply elasticity indicates a more responsive supply to price changes, while a lower supply elasticity indicates a less responsive supply.
It is important to note that the elasticity of supply can vary across different products and industries. Some goods may have a more elastic supply, meaning that suppliers are highly responsive to price changes, while others may have a more inelastic supply, indicating a less responsive supply to price changes. Factors such as production costs, availability of inputs, and time horizons can influence the elasticity of supply for a particular product.