elasticity+of+supply

Supply Elasticity
The percentage amount by which supply changes in response to a one percent change in price. The higher the ratio, the more dramatically supply changes in response to a change in price. The supply elasticity of a product is usually dependent upon the current supply of that product. At low levels of supply, supply elasticity tends to be high but it usually decreases as supply rises. This is due to the difficulty producers encounter when attempting to increase supply as production approaches full capacity. (FXWords.com)


 * Elasticity of supply** is defined as: **% Change in Quantiy(a) / % Change in Price(a)**

The **Law of Supply** shows the amount that a supplier is willing to produce at a given price. The slope of the demand curve is positive and slopes upward from the left. As the graph below shows, a supplier is more willing to produce more at a higher price.



The website **Tutor2u.net** indicates **four** factors that have an effect on the **price elasticity of supply**:


 * Share Capacity:** The firms ability to react to changes in demand in a timely manner. If a firm can increase supply without incurring excess costs supply tends to be more elastic.


 * Stocks**: A firm with that has plenty of excess raw material, in-process, and finished goods are much more able to keep up with demand changes at a given point in time and prices will remain more elastic.


 * Ease of Factor Substitution:** The ease of firms in a given industry to transfer production to particular supplies demanded in a short period of time would allow prices to be more elastic.


 * Time Period:** The longer the amount of time firm has to make changes the more elastic the price.[[image:http://www.tutor2u.net/economics/content/diagrams/supplyelasticity1.gif width="359" height="300"]]

The figure below **(Tudor2u.net)** illustrates the four possible outcomes based on the elastcity of supply:




 * Perfect inelastcity:** Suppliers are not able to increase quantity. A change in demand can only increase(decrease) equlibrium price.
 * Perfect elasticity:** Suppliers are able to supply an infinite quantity ata given price. A change in demand only changes quilibrium quantity demanded.
 * Inelastic:** A change in demand affects the price more thant the quantity supplied.
 * Elastic:** A change in demand affects the quantity demanded more than the price.

Price Elasticity > 1 then Supply is Price Elastic (Supply is sensitive to price changes) Price Elasticity= 1 then Supply is Unit Elastic Price Elasticity< 1 then Supply is Price Inelastic (Supply is not sensitive to price changes) (About.com:Economics)
 * Interpretation of the Supply Elasticity**:


 * Questions:**

1) What is an example(s) of an industry where supply is inelastic? A) Automotive B) Agriculture C) Energy D) Entertainment

2) At perfect elasticity of supply,a shift left in the demand curve will_. A) raise the price B) raise the quantity supplied C) lower the price D) lower the quantiy supplied

3) When the price changes more relative to the quantity supplied, . A) supply is perfectly elastic B) supply is perfectly inelastic C) supply is elastic D) supply is inelastic

4) If the change in Pa= 4% and the change in __Qs,a= 10%, then _.__ A) Price Elasticity= -2.5 and supply is inelastic B) Price Elasticity= 0.4 and supply is elastic C) Price Elasticity= 2.5 and supply is elastic D) Price Elastcity= 0.4 and supply is inelastic

5) What factor(s) do NOT have an effect on the elasticity of supply? A) Time period B) Full capacity C) Stock shortage D) Lack of substitutes E) None of the above


 * Answers:**

1) B. Agriculture- the supply of grain is inelastic in the short-run when it is harvested because there is of the long time between seasons 2) C. It would only lower the quantity supplied. The price remains constant. 3) D. Inelastic 4) C. %Change in Qs,a=10 %Change in Pa= 4 (%10/ %4 = 2.5) 2.5>1= elastic 5) E. All of the factors would have an effect on the elasticity of supply

__**References**____ Investopedia- http://www.investopedia.com/university/economics/economics3.asp Tutor2u.net- http://www.tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm About.com- http://economics.about.com/cs/micfrohelp/a/supply_elast.htm FXWords.com- http://www.fxwords.com/s/supply-elasticity.htm Wikipedia.org