Elasticity of Supply

Definition

Elasticity of supply measures the responsiveness of the quantity supplied of a good or service to changes in its price. It quantifies the degree to which producers are willing to increase or decrease the amount they offer for sale in response to price changes.

5 Must Know Facts For Your Next Test

1. Elasticity of supply is a key concept in understanding how producers respond to changes in market conditions.
2. Goods with high elasticity of supply, such as agricultural commodities, tend to have supply curves that are relatively flat, indicating producers are more responsive to price changes.
3. Factors that influence the elasticity of supply include the availability of production inputs, the time frame being considered, and the ability of producers to adjust their output levels.
4. Perfectly elastic supply, where producers can increase or decrease output without any change in price, is an important benchmark in economic theory but rarely observed in the real world.
5. The elasticity of supply has important implications for the effects of government policies, such as price controls or subsidies, on market outcomes.

Review Questions

• Explain how the concept of elasticity of supply relates to the behavior of producers in a perfectly competitive market.
  • In a perfectly competitive market, producers are price takers, meaning they have no ability to influence the market price. The elasticity of supply determines how producers respond to changes in the market price. Goods with highly elastic supply curves, such as agricultural commodities, will see producers quickly increase or decrease the quantity supplied in response to price changes. This helps to maintain the equilibrium in a perfectly competitive market, as producers adjust their output to match the changing demand conditions.
• Describe the factors that influence the elasticity of supply and how they impact the responsiveness of producers to price changes.
  • The elasticity of supply is influenced by several key factors, including the availability of production inputs, the time frame being considered, and the ability of producers to adjust their output levels. Goods with readily available inputs and the capacity to quickly adjust production will tend to have more elastic supply curves, as producers can more easily increase or decrease the quantity supplied in response to price changes. Conversely, goods with limited inputs or long production cycles will have less elastic supply, as producers face greater constraints in adjusting output. Understanding these factors is crucial for predicting how producers will react to changes in market conditions.
• Analyze the implications of perfectly elastic supply on the effectiveness of government policies, such as price controls or subsidies, in a perfectly competitive market.
  • In a perfectly competitive market with perfectly elastic supply, the implementation of government policies like price controls or subsidies would have limited impact on the overall market outcome. With a perfectly elastic supply curve, producers are able to adjust the quantity supplied infinitely in response to even the smallest change in price. This means that the imposition of a price ceiling or the provision of a subsidy would not significantly affect the equilibrium price or quantity in the market, as producers would simply adjust their output to maintain the original equilibrium. The inability of such policies to influence market outcomes in a perfectly competitive market with perfectly elastic supply is an important consideration for policymakers when evaluating the potential effects of interventions in these types of markets.

Related terms

Supply Curve: A graphical representation of the relationship between the price of a good or service and the quantity supplied. The slope of the supply curve indicates the elasticity of supply.

Price Elasticity of Supply: A measure of the percentage change in quantity supplied in response to a one percent change in price, holding all other factors constant.

Perfectly Elastic Supply: A situation where the quantity supplied changes infinitely in response to even the smallest change in price, resulting in a horizontal supply curve.