Because the price elasticity of supply measures the responsiveness of quantity supplied to the price, it is reflected in the appearance of the supply curve. Figure 5 shows five cases. In the extreme case of a zero elasticity, as shown in panel (a), supply is perfectly inelastic, and the supply curve is vertical. In this case, the quantity supplied is the same regardless of the price. As the elasticity rises, the supply curve gets flatter, which shows that the quantity supplied responds more ‘to changes in the price. At the opposite extreme, shown in panel (e), supply is perfectly elastic. This occurs as the price elasticity of supply approaches infinity and the supply curve becomes horizontal, meaning that very small changes in the price lead to very large changes in the quantity supplied.

In some markets, the elasticity of supply is not constant but. varies over the suppl curve. Figure 6 shows a typical case for anindustry in which firms have factories with a limited capacity for production. For low levels of quantity supplied, the elasticity of supply is high, indicating that firms respond substantially to changes in the price. In this region, firms have capacity for production that is not being used, such as plants and equipment idle for all or part of the day. Small increases in price make it
profitable for firms to begin using this idle capacity. As the quantitysupplied rises.Tirms begin to reach capacity. Once capacity is fully used, .increasing production further requires the construction of new plants. To induce firms to incur this extra expense, the price must rise substantially, so supply becomes less elastic.

Figure 6 presents a numerical example of this phenomenon. When the price rises from $3 to $4 (a 29 percent increase, according to the midpoint method), the quantity supplied rises from 100 to 200 (a 67 percent increase). Because quantity supplied moves proportionately more than the price, the supply curve has elasticity greater than 1. By contrast, when the price rises  from $12 to $15 (a 22 percent increase), the quantity supplied rises from 500 to 525 (a 5 percent increase). In this case, quantity supplied moves proportionately less than the price, so the elasticity is less than 1.

[av_button label='Get Any Economics Assignment Solved for US$ 55' link='manually,' link_target='' color='red' custom_bg='#444444' custom_font='#ffffff' size='large' position='center' icon_select='yes' icon='ue859' font='entypo-fontello']

Share This