Price Elasticity of supply can be defined as the responsiveness of the supply of goods when there is a change in the market price of the goods. Let us breakdown this definition.
Here the term responsiveness means the time required to respond to a particular demand. It is ensured that the time required to respond should be as low as possible. The faster the time to respond, the better it is for the customer.
This responsiveness is important when there is a change in the market price of the goods. There may be an increase or decrease in the price of goods due to unforeseeable circumstances, but it is expected that the responsiveness should be as fast as possible.
Price elasticity of supply is directly proportional to the price of the goods. That means the goods have a high elasticity of supply if its supply increases with the increase in the price of the goods and vice versa.
The meaning of Elasticity of Supply
The elasticity of supply is a concept of economics which shows the change in the supply of goods with the change in their price. Therefore, the elasticity of supply can be calculated by dividing the change in the supply of goods with the change in the price of the goods in the market.
The elasticity of supply is mainly dependent on the price of the goods. Therefore, it is calculated using the change in the price and hence, known as price elasticity of supply.
Organizations always try to be responsive to the market conditions and the fluctuations in the price. Having the high responsiveness to the changing price make a firm more competitive and hence, organizations can generate more revenue.
Organizations undertake actions such as keeping the sufficient stock of raw material, increasing capacity, better distribution and storage systems, training employees, and use the modern technology to increase their responsiveness for the change in the prices.
By following these techniques, the price elasticity of supply can be control, and companies don’t have to face the loss of revenue. The elasticity of supply can be easily calculated using the formula of price elasticity of supply.
However, it is important to know accurate values of change in price and change in supply. In the next section, you will learn about the formula of elasticity of supply.
The formula of Price elasticity of supply
Price Elasticity of supply is also referred to as PES in economics. It can be calculated by dividing the percentage in the quantity of supply of goods with the percentage change in its price. Following is the equation which can be used to calculate the elasticity of supply.
Price Elasticity of Supply (PES) = Percentage % change in the quantity of supply/ Percentage change in the price
5 Types of Elasticity of supply
There are five types of elasticity of supply.
#1 Perfectly Elastic Supply:
This type of elasticity of supply is for those goods whose supply ceases completely when the price of the goods drops slightly, and the supply of the goods become infinite when there is even a little increase in the price of the goods.
Therefore, it is clear here that the producers of such goods are willing to supply goods at a high price only.
#2 Unitary Elastic Supply:
This type of elasticity of supply is for those goods the change in the price of goods is exactly equal to the change in the supply of goods. In mathematical terms, we can say that the price of the goods is directly proportional to the supply of goods. Therefore unitary elasticity of supply is always equal to one.
#3 Perfectly Inelastic Supply:
This type of elasticity of supply is for those goods whose supply does not get affected by the change in its price. A specific supply of goods can be delivered at any given price.
The elasticity of supply for such goods is equal to zero. For example, the supply of exclusive goods or items fall is known as a perfectly inelastic supply.
#4 Relatively Less Elastic Supply:
This type of elasticity of supply is for those goods whose supply changes relatively less when compared to the change in its price. Therefore, their value of elasticity supply is always less than one.
#5 Relatively Greater Elastic Supply:
This type of elasticity of supply is for those goods whose supply changes more when compared to the change in its price. Therefore, their value of elasticity supply is always greater than one.
How to Calculate Price Elasticity of Supply?
Let us calculate the price elasticity of supply with the help of an example. In this example, we will assume the price of the commodity and using that data; we will calculate the price elasticity of supply.
Let us consider the original price of goods is $4, and the changed price is $5. Therefore, we can say that the old price is equal to $4 and the new price is $5. If you are asked to solve this question in the exam, then you will be provided the values of both demand and supply data.
Make sure to pick the value of supply from the given information. In this example, we assume that the supply of the goods was 100 when the price of the goods was $4 and the supply of the goods is 120 when the price of the goods is $5.
Old Price = $4
New Price = $5
Old quantity Supplied = 100
New Quantity Supplied = 120
Percentage change in the quantity supplied = (Quantity supplied new-Quantity Supplied old)/ Quantity supplied old
= 120-100/100 = 20/100 = 1/5 =0.2
Percentage change in the price = (New Price- old price)/Old price
= 5-4/4 = ¼ = 0.25
Let us put the values above calculated values in the Formula of Price elasticity of supply
Price Elasticity of Supply (PES) = Percentage % change in the quantity/ Percentage % change in the price
=0.2/0.25 = 0.8
Hence, we got a positive value here. Therefore, the price elasticity of the goods when price changes from $4 to $5 are 0.8.
Factors that affect the Elasticity of supply
There are various factors which affect the price elasticity of supply. In this section, you will learn about them one by one.
#1 Time:
Time the most important factor which affects the price elasticity of supply.
When the price of the goods changes and producers have small window to increase the production of supply, and due to other factors the production of the goods can’t be increased, therefore, the supply of the goods becomes inelastic and contrast to this, if there is enough time to supply the goods when there is a change in the price of goods then the supply of the goods will be called more elastic.
#2 Storability of Goods:
There are a few goods which can be stored for a long period, and there are goods which cannot be stored so the goods which can be stored for a long period have more elasticity of supply compared to the other goods.
#3 Resources required for the production:
The goods have relatively more elasticity of supply if the resources required to produce them are easily available.
#4 Producers of the goods:
The supply of goods will be more elastic if there is a number of producers of goods.
#5 Mobility of resources:
The supply of the goods will be more elastic if the resources required for the production of the goods can be moved easily.
#6 Infrastructure facilities required for the production process:
Some producers have infrastructure which can produce a limited amount of goods in a certain period of time and it is usually difficult to expand the supply of goods when the price of goods increases.
#7 Capacity:
Some producers have more capacity to store and produce goods. They usually store an excessive amount of goods to take advantage of the rise in the prices. Such goods will have more elasticity of supply.
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