Chapter 4:

Elasticity

Elasticity of
Supply
 Meaning of Elasticity of Supply

Elasticity of Elasticity of Elasticity of Supply

Law of Supply
Supply Supply
if price goes up, supply will
To quantify such change Elasticity of supply It is also defined as the
increase. But how much
we require the concept of measures the degree of percentage change in
supply will rise in response to
elasticity of supply that responsiveness of quantity quantity supplied divided by
an increase in price cannot be
measures the extent of supplied to a change in own percentage change in
known from the law of supply.
quantities supplied in price of the commodity price.
response to a change in
price.
 CALCULATION ELASTICITY
OF SUPPLY

%Qs
Es 
Where:
ES = Elasticity of Supply
% 𝛥 P= % change in quantity supplied
%p % 𝛥𝑄=𝑠 % change in price
 Elastic Supply (ES>1):
Types of Elasticity of Supply

• Supply is said to be elastic when Price

Q
1
a given percentage change in P
price leads to a larger change in %Q  %P
quantity supplied.
• Under this situation, the
numerical value of Es will be
greater than one but less than P1
infinity. P0
• Here quantity supplied changes
by a larger magnitude than does
price.

Q0 Q1 Quantity
 Inelastic Supply (ES<1):
Types of Elasticity of Supply

Q
Price 1
• Supply is said to be inelastic P

when a given percentage %Q  %P

change in price causes a smaller
change in quantity supplied.
• Here the numerical value of
elasticity of supply is greater P1
than zero but less than one.
P0

Q0 Q1 Quantity
 Unit Elastic of Supply (ES=1):
Types of Elasticity of Supply

Q
Price 1
• If price and quantity supplied change P
by the same magnitude, then we have %Q  %P
unit elasticity of supply.
• Any straight line supply Curve passing
through the origin has an elasticity of
supply equal to 1.
• For any straight line positively-sloped P1
supply curve drawn through the origin,
the ratio of P/Q at any point on the P0
supply curve is equal to the ratio ∆
P/∆ Q. Note that ∆ P/∆ Q is the slope
of the supply curve while elasticity is
(1/∆P/∆Q = ∆Q/∆P).Thus, in the
formula (∆Q/∆P. P/Q), the two ratios Q0 Q1 Quantity
cancel out each other.
 Perfectly Elastic Supply (ES= ꝏ):
Types of Elasticity of Supply

• The numerical value of elasticity of Price Firm supply any

supply, in exceptional cases, may amount at a
reach up to infinity. price OP1
• The supply curve has an elasticity of
supply equal to infinity.
• Here the supply curve has been
drawn parallel to the horizontal axis. P1
• The economic inter­pretation of this
supply curve is that an unlimited
quantity will be offered for sale at the
price OP1. If price slightly drops down
below OP1, nothing will be supplied.

0 Quantity
 Perfectly Inelastic Supply (ES= 0):
Types of Elasticity of Supply

• Another extreme is the completely or Price No effect on

perfectly inelastic supply or zero supply following
elasticity. a change in
• price
Illustrates the case of zero elasticity.
This curve describes that whatever
the price of the commodity, it may
even be zero, quantity supplied
remains unchanged at OQ.
• This sort of supply curve is conceived
when we consider the supply curve of
land from the viewpoint of a country,
or the world as a whole.

0 Q1 Quantity
 THE DETERMINANT Elasticity OF SUPPLY
1 2
The Nature of the
Good
• As with demand elasticity, the most
important determinant of elasticity
of supply is the availability of
substitutes.
• In the context of supply, substitute
goods are those to which factors of
production can most easily be
transferred.
• For example, a farmer can easily
move from growing wheat to
producing jute. Of course, mobility
of factors is very important for such
substitution.
The Definition of the
Commodity
• As in the case of demand,
elasticity of supply also
depends on the definition of the
commodity.
• The narrowly a commodity is
defined the greater is its
elasticity of supply.
• For example, it is easier for a
tailor to transfer resources from
producing red skirts to green
skirts than from skirts to men’s
trousers.
 THE DETERMINANT Elasticity OF SUPPLY
3 4
Time The Level of Price
• Time also exerts considerable
• Elasticity of supply is also likely
influence on the elasticity of supply.
to vary at different prices.
• Supply is more elastic in the long run
• Thus, when the price of a
than in the short run.
commodity is relatively high,
• The longer the time period, the easier
the producers are likely to be
it is to shift resources among products,
supplying near the limits of
following a change in their relative
their capacity and would,
prices.
therefore, be unable to make
• This is usually true in the case of most
much response to a still higher
agricultural commodities, because of
price.
the natural time lag between planting
• When the price is relatively low,
and harvesting of crops.
however, producers may well
have surplus capacity which a
higher price would induce them
to use.
Thank You