“Elasticity of Supply

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 10.04.2020>

Dear reader,

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.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
Ιωάννου-Σεργίου Μ., Μάτση Μ., Σάββα Ν., Σταύρου-Παπαδοπούλου Λ., Οικονομικά Α’ Λυκείου, Α΄ Έκδοση 2016. Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Β’ Λυκείου, Κύπρος, Α΄ Έκδοση 2016.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

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