PRICE ELASTICITY OF SUPPLY: MEANING, TYPES AND DETERMINANTS

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In analyzing supply, our focus has been on understanding the general direction of change in price and its effect on the quantity supplied. 

To augment our understanding of this, It is necessary to look at the extent of responsiveness of quantity supplied to price changes. 

Given this, we are going to be playing scholarship to price elasticity of supply.

Price elasticity of supply measures the responsiveness of quantity supplied to changes in prices. It is calculated as:

$PED=\frac{\%Q_s}{\%P}$

Where $\%Q_s$ is the percentage change in quantity supplied.

$\%P$ is the percentage change in price.

Supply and price have a positive relationship, therefore, the numerical value of price elasticity of supply is usually positive.

Types Of Price Elasticity Of Supply

Just like PED, they are five cases of price elasticity of supply, these are:

1. Relatively elastic supply: This occurs when the proportionate change in quantity supplied is larger than the proportionate change in price.

In other words, relative elastic supply is one in which a small change in price results in a larger change in quantity supplied.

In this case, the numerical value of price elasticity of supply will be greater than one. 
Relatively elastic demand is also called more than unit elastic supply.

An example of a relatively elastic supply is a $5\%$ change in price resulting in a $7\%$ change in quantity supplied.

2. Relatively inelastic supply: This occurs when the percentage change in quantity supplied is lesser than the percentage change in price.

More appropriately, a relatively inelastic supply is one in which a change in price results in a smaller or insignificant change in quantity supplied.


In this case, the numerical value of price elasticity of supply would be lesser than one.
Relatively elastic supply is also called less than unit elastic supply.

A $10\%$ change in price which leads to a $4\%$ in quantity supplied is a good example of relatively elastic supply.

3. Unitary elastic supply: Supply is said to be unitary elastic when the proportionate change in quantity supplied is equal to the proportionate change in price.

This means that a price change would be caused the quantity supplied to change by the same percentage.


If supply is unit elastic, the numerical value of price elasticity of supply is one.

A $40\%$ change in quantity supplied caused by $40\%$ is an example of unitary elastic supply.

4. Perfectly inelastic supply: Supply is perfectly elastic when the quantity supplied does not change in response to price. 

This means that the same quantity would be supplied irrespective of the price.

If a $\%5$ change in price leads to a $0\%$ change in quantity supplied, it follows that supply is perfectly inelastic.

In this case, the numerical value of the price elasticity of supply is $0$.

As you can see from the accompanying illustration, the supply curve for a perfectly inelastic supply is a vertical straight line.

A perfectly inelastic supply is also called a zero elastic supply.

5. Perfectly elastic supply: Supply is said to be perfectly inelastic when a change in price causes an infinite change in the quantity supplied.

Where supply is perfectly elastic, a price decrease will result in zero supply as suppliers will only supply goods at a given price. 

Hence, the numerical value of a perfectly elastic supply is infinity. The demand curve for a perfectly elastic supply is a horizontal line.

Perfectly elastic supply is also called infinity elasticity supply

Having learned the different types of price elastic, our next task is to explore the determinants of price elasticity in supply

Determinants Of Price Elasticity Of Supply

1. Ease of entry and exit: Price elasticity of supply is directly influenced by the ease of entry and exit in the market. 

If there is the freedom to enter and exit a market, supply will most likely be elastic.

This is because high prices may prompt new entrants into the market, thereby increasing output.

Conversely, low prices may cause suppliers to leave the market thereby, reducing output.

If there is a barrier to entry and exit, supply will likely be inelastic as the output will only change by a smaller amount than price change.

2. Ability to Price discrimination: Price discrimination, like I told you previously, occurs when a supplier charges different prices for identical goods to different buyers of the goods.

Supply will be elastic if a supplier can successfully price discriminate.

This is because suppliers can successfully move sales from a market with a lower price to another market with a higher price without hindrances.

Conversely, if a supplier cannot price discriminate, supply will likely be inelastic as a decrease in price may have less effect on supply since the supplier can not successfully price discriminate.

3. Time: Another major determinant of supply is time. As economists have observed, the price elasticity of supply tends to be higher in the long run than in the short run.

In the short run, supply is usually inelastic. This is because most producers do not promptly adjust to price changes as some price changes (like stocks change) may be temporary.

In the long run, supply tends to be elastic as a supplier should be able to respond or readjust to price changes.

In short, the longer the adjustment to change in price, the higher the price elasticity of supply will be.

4. Factor mobility: if factor inputs of a good can be easily used to produce substitutes, supply will be elastic.

This is because if the price of the good falls, its factor inputs can easily switch to other profitable substitutes.

5. Ease of storage: Another determinant of price elasticity of supply is the ease of storage. 

Two specific cases can be identified: Durable and perishable goods.

Durable goods are long-lasting goods, therefore they can be easily stored. Supply for durable is mostly elastic as goods can be stored If the price falls.

Perishable goods, on the other hand, are easily stored for a long time. They are perishable and do not last for long period as their durable counterpart.

Hence, the supply of perishable goods tends to be inelastic as they can not be stored if the price falls.

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Conclusion

Knowledge of price elasticity of supply is very necessary for understanding how responsive are firms to price changes.

If a firm supply is elastic, it means the firm is sensitive to price changes. If it is inelastic, it means that the firm is relatively insensitive to price change.

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