<Last updated 10.04.2020>
Hi! If you are interested in Economics, check below to help your understanding. You should take a look at this short article in which I explain what is Elasticity and, more specifically, what we mean by Elasticity of Supply.
In order to measure the degree of change in quantity supplied, as a result of a price change, we use Elasticity of Supply: the measurement of the degree of change in quantity supplied resulting from price changes when other factors affecting the Supply stay fixed.
Elasticity of Supply= % change in quantity supplied / % change in price or
ES = % ΔQ / % ΔP
ES = % 40 / % 20 = 2 : elastic
ES = % 20 / % 40 = 0.5 : inelastic (i.e. it is not possible to increase much the production a) by using the current quantity of factors of production or b) due to technical difficulties).
In the following example, elasticity is higher than 1. This means that a price increase would lead to a relatively higher increase in output which businesses would want to produce and provide to the people.
Unit Elastic Supply: If a good has Unit Elastic Supply, it means that the percentage increase/decrease in price and quantity are the equal. ES = 1
Perfectly Inelastic Supply: ES = 0: It means that the quantity supplied is the same regardless of price level.
Perfectly Elastic Supply: ES = 00: means that any decrease in the product price would immediately cause the supply to shift to zero. (the percentage change of quantity / the percentage change of price) equals to infinity.
What Determines Elasticity of Supply? Here are some important factors:
a) Time: Time is an important factor, the more time needed to produce the good, the lower the elasticity of supply > Less production/quantity supplied will be the respond to a high increase in price (market price). Short-term vs Long-term > in the long-term the elasticity is higher.
b) The degree of specialization of factors of production: If the factors of production needed to produced a good need specialization (i.e. skilled and experienced Labor) then the elasticity of supply is lower > this results from the fact that there is scarcity of such resources needed, so production cannot change much due to a price increase in this case.
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