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Elasticity of supply Elasticity of supply measures the change in the amount that a firm supplies in response to a change in price. It is measured as follows percentage change in quantity supplied / percentage change in price Values of price elasticity of supply Elasticity is greater than one - the good is elastic and is highly responsive to changes in price. A percentage change in price leads to a larger percentage change in the quantity supplied. A straight line supply curve will intersect the price axis. Elasticity is equal to one - the good has unitary elasticity, a percentage change in price will lead to an equal percentage change in the quantity supplied. Any straight line supply curve that intersects the origin will have unitary elasticity. Elasticity is less than one - the good is inelastic and not very responsive to changes in price. A percentage change in price leads to a smaller percentage change in quantity. . A straight line supply curve will intersect the quantity axis. Elasticity is equal to zero - the good is perfectly inelastic and a change in price lead to no change in the quantity supplied. Elasticity is equal to infinity - the good is perfectly elastic and any decrease in price will cause the quantity supplied to fall to zero. Factors affecting Elasticity of supply Spare Capacity If there is spare capacity , the firm should be able to increase output without a rise in costs and therefore supply will be elastic. Supply of goods and services is often elastic at the end of an economic recession, when there is plenty of spare labour and capital resources available to step up output. Stocks If stocks of raw materials, components and finished products are high then the firm is able to respond to a change in demand quickly by supplying these stocks onto the market - supply will be elastic. Ease of factor substitution Consider the sudden increase in demand for petrol canisters during the Autumn 2000 fuel shortage. Could manufacturers of cool-boxes or other types of canister have switched their production processes quickly to meet the high demand for fuel containers? If capital and labour resources are occupationally mobile then the elasticity of supply for a product is higher than if capital equipment and labour cannot be switched and the production process is inflexible in response to changes in demand for goods and services. Time period Supply is more elastic the longer the time period a firm has to adjust its production. In the short run, the firm may not be able to change its factor inputs. In agricultural markets, the supply is fixed and determined by planting decisions made months before, and climatic conditions, which affect yields. Economists sometimes refer to the momentary time period – a time period that is short enough for supply to be fixed i.e. supply cannot respond at all to a change in demand. Illustrating price elasticity of supply When supply is perfectly inelastic, a shift in demand has no effect on the equilibrium quantity supplied onto the market. Examples include the supply of tickets for sports or musical venues, and the short run supply of agricultural products (where the yield is fixed at harvest time) the elasticity of supply = zero when the supply curve is vertical. When supply is perfectly elastic a firm can supply any amount at the same price. This occurs when the firm can supply at a constant cost and has no capacity limits to its production. A change in demand alters equilibrium quantity but not the price When supply is relatively inelastic a change in demand affects the price more than the quantity supplied. The reverse is the case when supply is relatively elastic. A change in demand can be met without a change in market price Price Perfectly inelastic Note that agricultural products have an inelastic supply and this can lead to price volatility, especially when you consider frequent shifts in the Supply curve due to weather factors, and the fact that Demand for foodstuff tends to be price inelastic due to the fact that food is a necessity. D Qs Price inela