Economics Elasticity Of Supply Questions
Price elasticity of supply is a measure of the responsiveness of the quantity supplied to a change in price. It indicates how much the quantity supplied changes in response to a change in price. In relation to market structure, the concept of price elasticity of supply can vary.
In perfectly competitive markets, where there are many buyers and sellers, and firms are price takers, the price elasticity of supply tends to be high. This is because firms can easily enter or exit the market, and there are no barriers to entry or exit. As a result, if the price increases, firms can quickly increase their production and supply more goods to the market. Conversely, if the price decreases, firms can easily reduce their production or exit the market.
In monopolistic markets, where there is only one seller or a few dominant firms, the price elasticity of supply tends to be low. This is because monopolistic firms have more control over the market and can restrict the quantity supplied to maintain higher prices and profits. They may face limited competition, making it difficult for new firms to enter the market and increase supply.
In oligopolistic markets, where there are a few large firms dominating the market, the price elasticity of supply can vary. It depends on the behavior and strategies of the firms. If the firms in an oligopoly compete aggressively, the price elasticity of supply may be higher as they are more responsive to price changes. However, if the firms collude or engage in strategic behavior, the price elasticity of supply may be lower as they coordinate their actions to limit supply and maintain higher prices.
Overall, the concept of price elasticity of supply in relation to market structure highlights the different degrees of responsiveness of supply to price changes depending on the level of competition and market power of firms.