Elasticity of Supply

Definition

Elasticity of supply refers to the responsiveness of the quantity supplied of a good or service to changes in its price. It measures the degree to which the quantity supplied reacts to price changes in the market.

5 Must Know Facts For Your Next Test

1. The elasticity of supply is influenced by the ability of producers to adjust their production levels in response to price changes.
2. Factors that affect the elasticity of supply include the time period being considered, the availability of resources, and the ability to substitute inputs.
3. Elastic supply curves are generally flatter, indicating that producers are more responsive to price changes, while inelastic supply curves are steeper, indicating that producers are less responsive to price changes.
4. The elasticity of supply is an important factor in determining the impact of government policies, such as taxes or subsidies, on the market for a good or service.
5. Understanding the elasticity of supply is crucial for predicting the effects of changes in government borrowing on investment and the trade balance.

Review Questions

• Explain how the elasticity of supply affects the impact of government borrowing on investment.
  • The elasticity of supply plays a crucial role in determining the impact of government borrowing on investment. If the supply of loanable funds is elastic, an increase in government borrowing will lead to a smaller increase in interest rates, which will have a smaller negative impact on private investment. Conversely, if the supply of loanable funds is inelastic, an increase in government borrowing will lead to a larger increase in interest rates, which will have a greater negative impact on private investment.
• Describe how the elasticity of supply can influence the relationship between government borrowing and the trade balance.
  • The elasticity of supply can also affect the relationship between government borrowing and the trade balance. If the supply of domestic goods is elastic, an increase in government borrowing and spending will lead to a smaller increase in domestic prices, making domestic goods more competitive in international markets. This can improve the trade balance. However, if the supply of domestic goods is inelastic, an increase in government borrowing and spending will lead to a larger increase in domestic prices, making domestic goods less competitive and potentially worsening the trade balance.
• Analyze how changes in the elasticity of supply could impact the effectiveness of government policies aimed at addressing the effects of increased government borrowing on investment and the trade balance.
  • The effectiveness of government policies aimed at addressing the effects of increased government borrowing on investment and the trade balance can be significantly influenced by changes in the elasticity of supply. If the supply of loanable funds or domestic goods becomes more elastic, government policies such as tax cuts or subsidies may be more effective in mitigating the negative impacts of increased borrowing on investment and the trade balance. Conversely, if the supply becomes more inelastic, these policies may be less effective, and the government may need to consider alternative measures, such as direct interventions in the financial or trade markets, to address the adverse effects of increased borrowing.

Related terms

Inelastic Supply: Inelastic supply occurs when the quantity supplied responds relatively little to changes in price, resulting in a supply curve that is relatively steep.

Elastic Supply: Elastic supply occurs when the quantity supplied responds significantly to changes in price, resulting in a flatter supply curve.

Supply Curve: The graphical representation of the relationship between the price of a good or service and the quantity supplied.