When change in the quantity supplied is proportional to the change in the quantity of price the producer is said to have?

The Elasticity of Supply Definition

The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to the change in the price of a given commodity. It is an important parameter in determining how the supply of a particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could be made by selling that product at its price difference. In this article, we will discuss the elasticity of the supply formula, different types of elasticity of supply, the supply curve characteristics, and many more. 

The price elasticity of supply refers to the response to a change in a good or service's price by the supply of that good or service. According to basic economic theory, the supply of goods decreases when its price increases. 

Similarly, one can also study the price elasticity of demand. This illustrates how easily the demand for a product can change based on changes in price. Price changes fairly rapidly if the price of a product changes. This is known as price elasticity of demand. 

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply formula which is based on its definition.

\[E_{S} = \frac{\% \Delta P}{\% \Delta Q}\]

Here, \[E_{S}\] denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by the percentage change in the price of the commodity. 

The Law of Supply

Since producers compete for profits in a free market, profits are never constant over time or across different goods. Entrepreneurs, therefore, shift resources and labor efforts towards products that are more profitable and away from those that are less profitable. 

The law of supply refers to the tendency for price and quantity to be related. For instance, assume that consumers demand more oranges and fewer apples. More dollars are bidding for oranges, but fewer for apples, resulting in higher orange prices.

5 Types of Elasticity of Supply

Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to know them in more detail. 

1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage change in the price is zero for any change in the quantity supplied.

2. More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.

3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.

4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price elasticity of supply is less than 1.

5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality.

The point to be noted is that the elasticity of supply is always a positive number. This is because the law of supply states that the quantity supplied is always directly proportional to the change in the price of a particular commodity. This means that the supply of a product either increases or remains the same with the increase in its market price. 

Determinants of Price Elasticity of Supply

• Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises slowly, then Supply will be elastic.

• Time- As the price elasticity of supply increases over time, producers would increase the quantity supplied by a greater percentage than the price increases.

• Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms. This occurs because other firms can step in to fill the supply gap.

• Mobility of Factors of Production- When the factors of production are mobile, then the price elasticities of supply are higher. This means that labor and other manufacturing inputs may be imported from other regions to quickly increase production.

The Elasticity of Supply Curves

We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types. Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the graph. 

Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain conclusions from the different values of elasticity of the supplied formula. 

• When \[E_{S}\] = infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis. 

• When \[E_{S} > 1\], a flatter curve (\[S_{2}S_{2}\]) is obtained which when extended intersects the Y-axis.

• When \[E_{S} < 1\], it results in a steeper curve (\[S_{3}S_{3}\]), which when extended crosses the X-axis.

• When \[E_{S} = 1\], the curve (\[S_{4}S_{4}\]) comes out to be a straight line that passes through the origin at an angle of 45 degrees. 

• When \[E_{S} = 0\] (Perfectly inelastic supply), the curve (\[S_{1}S_{1}\]) obtained is parallel to the Y-axis.  

This graph shows us the relationship between the different types of elasticity of supply and helps in understanding the elasticity of supply definition better. 

Did You Know?

Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the market, which means that their prices are inelastic. This is because these goods are crucial to the everyday lives of consumers.

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