Supply Elasticity

Definition

Supply elasticity 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 changes in relation to a change in price, all other factors held constant.

5 Must Know Facts For Your Next Test

1. The price elasticity of supply is a measure of how responsive the quantity supplied is to changes in the good's price.
2. Factors that affect the price elasticity of supply include the ability to adjust production, the time horizon, the availability of resources, and the number of suppliers.
3. Goods with a high price elasticity of supply can be easily produced or extracted, while goods with a low price elasticity of supply are more difficult to produce or extract.
4. The time horizon is a crucial factor in determining supply elasticity, as producers have more flexibility to adjust production in the long run compared to the short run.
5. The availability of resources, such as raw materials and labor, also influences the price elasticity of supply, as producers may be constrained in their ability to increase production.

Review Questions

• Explain how the time horizon affects the price elasticity of supply.
  • The time horizon is a crucial factor in determining the price elasticity of supply. In the short run, producers have limited ability to adjust production in response to price changes, as they may be constrained by factors such as fixed capital, labor, and raw materials. However, in the long run, producers have more flexibility to adapt their production processes, acquire additional resources, and expand their capacity. As a result, the price elasticity of supply is generally lower in the short run and higher in the long run, as producers have more time to respond to price changes.
• Describe the relationship between the availability of resources and the price elasticity of supply.
  • The availability of resources, such as raw materials and labor, is a key determinant of the price elasticity of supply. Goods with abundant and easily accessible resources tend to have a higher price elasticity of supply, as producers can more easily adjust their production levels in response to price changes. Conversely, goods with limited or scarce resources have a lower price elasticity of supply, as producers may be constrained in their ability to increase production, even if prices rise. The availability of resources, therefore, affects the flexibility and responsiveness of producers to changes in the market price.
• Analyze how the number of suppliers in a market influences the price elasticity of supply.
  • The number of suppliers in a market can also impact the price elasticity of supply. In a market with a large number of suppliers, the price elasticity of supply is generally higher, as individual producers have more flexibility to adjust their production levels in response to price changes. This is because in a competitive market, if one supplier raises their prices, other suppliers can quickly increase their own production to capture the additional demand. However, in a market with a small number of suppliers, the price elasticity of supply is typically lower, as individual producers have less ability to adjust their production without significantly affecting the overall market price.

Related terms

Price Elasticity of Supply: A measure of the sensitivity of the quantity supplied of a good or service to changes in its price, calculated as the percent change in quantity supplied divided by the percent change in price.

Perfectly Inelastic Supply: A situation where the quantity supplied does not change at all in response to a change in price, resulting in a price elasticity of supply equal to zero.

Perfectly Elastic Supply: A situation where the quantity supplied changes infinitely in response to the slightest change in price, resulting in a price elasticity of supply approaching positive infinity.