Meaning and Definitions of Elasticity of Supply:
The concept of elasticity of supply is a parallel concept to the concept of elasticity of demand. It may be defined as the responsiveness of the sellers to change in the price of the commodity. It points out reactions of the sellers to a particular change in the price of the commodity.
The quantity supplied of a commodity may increase or decrease consequent upon the change in price. The extent to which the quantity supplied of the commodity increases or decreases as a result of change in price is referred to as elasticity of supply. Elasticity of supply, thus, is the measure of change in quantity supplied due to change in price.
“Elasticity of supply is the ratio of percentage change in quantity supplied over the percentage change in price.” -LIPSEY
“Elasticity of supply is defined as the percentage change in quantity supplied divided by percentage change in price.” -PROF. BILAS
In simple words, elasticity of supply means the rate at which the quantity supplied of a commodity changes as a result of change in its price.
There are five degrees of elasticity of supply:
1. Perfectly Elastic Supply
2. Perfectly Inelastic Supply
3. Unitary Elastic Supply
4. Relatively Elastic Supply
5. Relatively Inelastic Supply
1. Perfectly Elastic Supply:
When without any change in price, supply may change to any extent, then the supply is perfectly elastic. Here the supply curve will be horizontal and parallel to the x-axis. It is illustrated in Fig. 10.1.
In this figure, SS is perfectly elastic supply curve. It is parallel to the x-axis. At price OP supply may be OQ1 or OQ2. Symbolically, it can be said that Es = ∞ or elasticity of supply is infinity. It is purely an imaginary concept.
2. Perfectly Inelastic Supply:
Supply is perfectly inelastic when a change in the price causes no change in supply. In other words, price has no influence on supply. Here, the supply curve will be a vertical line parallel to the y-axis. As shown in Fig. 10.2 SS is perfectly inelastic supply curve and is parallel to the y-axis. It signifies that even if price changes to OP1 or OP2, supply remains unchanged i.e., OQ.
In this case, elasticity of supply is said to be zero (or Es = 0). Supply of rare books, paintings, stamps and coins is of this type.
3. Unitary Elastic Supply:
Elasticity of supply is unitary when the change in the quantity supplied is in exact proportion to the change in price. The supply curve SS, which is a 45° line represents unitary elastic supply curve in Fig. 10.3. Here a change in price PP1 brings about an equal change in quantity supplied QQ1 (or ΔP = ΔQ). Symbolically, Es = 1.
4. Relatively Elastic Supply:
Supply is said to be relatively elastic when a small change in price brings about a large change in quantity supplied. A small rise in price leads to a great increase in supply and a small fall in price brings about a great decrease in supply. Supply curve SS is more elastic supply curve in Fig. 10.4. It has a positive intercept in the y-axis. In this case ΔP < ΔQ. Mathematically more elastic supply can be represented as Es > 1.
5. Relatively Inelastic Supply:
Supply is said to be y a relatively inelastic when a big change in price brings about a small change in supply. A big fall in price brings about a small fall in supply and a big rise in price brings about a small rise in supply. Supply curve SS in Fig. 10.5 is less elastic. It has a positive intercept in the x-axis. In this case ΔP > AQ. Symbolically, less elastic supply or inelastic supply is represented as ES<1.
The elasticity of supply is the measure of the responsiveness of the quantity supplied of a particular good to a change in price.
Following two methods of the measurement of elasticity of supply are discussed:
1. Percentage or Proportionate Method.
2. Geometric or Diagrammatic Method.
1. Percentage or Proportionate Method:
Elasticity of supply can be measured with the help of the following formula:
Now, since the price and quantity supplied generally move in the same direction, the coefficient of elasticity of supply viz., Es, has a positive sign.
If the numerical result of this formula is equal to one, we say supply is unitary elastic. If it is more than one, supply is said to be relatively elastic and if it is less than one, supply is relatively inelastic.
The value of the coefficient of elasticity of supply varies between zero and infinity.
The various results are tabulated below:
2. Geometric or Diagrammatic Method:
It is also called the Point Method. In this method price elasticity of supply (Es) is measured on a point of the supply curve.
Let SS1 be the supply curve. Suppose we want to find out Es at point P.
The method, to find out Es at P, can be followed in the following steps:
1. Draw a perpendicular (a straight line from P parallel to Y-axis) intersecting X-axis at Q. This gives us output OQ supplied at price P.
2. Extend the supply curve leftwards intersecting X- axis at S2. This gives us intercept S2Q on X-axis.
3. Divide the supply curve intercept S2Q by supply of output at point P. This gives Es at point P.
Since the numerator S2Q is greater than OQ, Es is greater than one (or Es > 1). The supply is elastic at point P. This gives us a general property of a straight line supply curve having an intercept in the Y-axis. Any straight line supply curve having a positive intercept in the Y-axis has price elasticity greater than one throughout.
In the above case supply curve is intersecting Y-axis and we find the Es > 1. If the supply curve intersect X-axis, Es < 1 and if passes through the origin, Es = 1.
These two situations are shown below:
(a) Es < 1
By applying the same formula-
Since numerator S2Q is smaller than denominator OQ, Es < 1. This gives us a general property of a straight line supply curve starting from X-axis has price elasticity less than one on all points.
(b) Es = 1
This gives us a general property of a straight line curve supply starting from origin. A Straight line supply curve passing through the supply origin has price elasticity equal to one on all points.
A horizontal curve shows perfectly elastic supply, while a vertical curve shows perfectly inelastic supply.
Following are the main factors which affect the elasticity of supply of a commodity:
1. Nature of the Inputs Used:
The elasticity of supply depends on the nature of inputs used for the production of a commodity. If factors of production are those which are commonly used (and therefore easily available), supply of the commodity will be elastic. On the other hand, if specialized factors are used (which are not easily available), supply will be less elastic.
2. Natural Constraints:
The elasticity of supply is also influenced by the natural constraints in the production of a commodity. If we wish to produce more teak wood, it will take years of plantation before it becomes usable. Supply of teak wood will therefore be less elastic.
3. Risk Taking:
The elasticity of supply depends on the willingness of entrepreneurs to take risk. If entrepreneurs are willing to take risk, the supply will be more elastic. On the other hand, if entrepreneurs hesitate to take risk, the supply will be inelastic.
4. Nature of the Commodity:
Perishable goods are relatively less elastic in supply than durable goods, because it is difficult to store the perishable goods.
5. Cost of Production:
Elasticity of supply is also influenced by cost of production. If production is subject to law of increasing costs, then supply of such goods will be inelastic.
6. Time Factor:
Longer the time period, greater will be the elasticity of supply. Because, over a long period of time, more and more factors are easily available and their input can be changed to increase (or decrease) output of the commodity.
7. Technique of Production:
If the technique is complex and needs large stock of capital, then the supply of the commodity will be less elastic, because production cannot be easily increased. On the other hand, goods involving simple technique of production will have more elastic supply.
Price Elasticity of Supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly and effectively, it can respond to changing market conditions, especially to price changes.
The following are the points of the importance of elasticity of supply:
1. Price Determination and Elasticity of Supply:
The concept of time element with reference to price determination as propounded by Dr. Marshall depends on elasticity of supply. In market period (or in very short period) since the supply is inelastic, hence demand plays an active role in the determination of the price of a product. Whereas in the long-run, supply being more elastic, it plays an active role in the determination of price.
2. Factor Pricing and Elasticity of Supply:
Modern theory of Rent states that a factor earns rent only if its supply is inelastic or less than perfectly elastic. Since the supply of land is inelastic, hence the entire income of land is rent. When supply of factors like labour or capital etc. becomes inelastic in short-period, then the extra income earned by these factors, due to increase in their demand, is of the kind of rent. It is called ‘Quasi Rent.’ When the supply of factor is perfectly elastic, then it does not earn any extra income as rent.
3. Taxation and Elasticity of Supply:
The concept of elasticity of supply is also very useful for the Finance Minister. It tells the Finance Minister that high taxes should be levied on those goods whose supply is inelastic. As heavy dose of tax on such commodities will have much effect on their supply. On the contrary where the supply of a commodity is elastic, less tax should be imposed.
Uses of Elasticity of Supply:
The concept of elasticity of supply has importance in factor pricing and commodity pricing as given below:
(1) Commodity Pricing:
Time element plays an important role in the price determination of a commodity. During short period the supply is inelastic and the demand determines the price of a commodity and the increase in demand will increase the price of a commodity because supply remains constant.
But in the long run supply can be adjusted to the quality demanded of a commodity during the long period because all the factors of production are variable and even the scale of production can be changed. Hence, supply plays an important role in determining the market price and normal price during long period.
(2) Factor Pricing:
Another important use of supply elasticity is the pricing of various factors of production. According to modern theory of rent each factor of production has rent element during short period because the supply is inelastic.
But in the long run supply of factors of production can be increased so the rent element disappears and rent is paid on land only because its supply is inelastic. Thus, elasticity of supply explains whether factors of production are in a position to earn more than what they are getting in the form of rent, wages, interest, profit and salary.