ELASTICITY OF SUPPLY
When a small fall in price leads to great contraction in supply, the supply is comparatively elastic. But when a big fall in price leads to a very small constraction in supply, the supply is said to be comparatively inelastic. Conversely. a small rise in price leading to a big extension in supply shows elastic supply, and a big rise in price leading to a small extension in supply indicaties inelastic supply. The elasticity of supply is really the measure of the ease with which an industry can be ;xpanded and of the behaviour of the marginal costs. If a slight increase in price is followed by the entr)’ of many new firms having minimum average cost equal toprice and the marginal cost does not rise, the supply is said to be perfectly elastic. In case, however, the increased output can be obtained only by an infinite increase in price and no new firm is attracted to the industry, the supply will be inelastic. In between these two extremes, there will be different degrees of elasticity. The degree of elasticity will depend, in a particular case, on the slope of the marginal cost curve and the shape of the average cost curves of the successive firms. The relation between price and the quantity supplied is rather like the relation between a whistle and a dog-the louder the whistle, the faster comes the dog; raise the price and the quantity supplied increases. If the dog is responsive-in economic terminology elastic- quite a small crescendo in the whistle will send him bounding along. If the dog is unresponsive or ‘inelastic’, we may have to whistle very loudly before he comes along at alt.”·
Different types of elasticity of supply. (I) Elasticity of supply when Ls = 0 This means there is no change in quantity supplied due to change in price.
This is when quantity supplied remains same even after price increases or decreases, them it is said to be perfactly inclastichy of supply.
In the above diagram price is increased from ‘OP’ to ‘OP1’ but the quality remained unchanged.
(Numerator is changing and denominator is zero
In other words there 1S no change in price but there is change in quantity supplied this is known as ‘perfectly elastic supply’:
Where PP1= Qc” This mean, the amount of change ill price is equal to the amount of change in quantity supplied. This is known as •Unit elastic supply.
In the above diagram the change in price is greater than the change in quantity supplied that means the price is changing more but the quantity supplied is relatively Jess. Hence this is referred as relatively inelastic supply.
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