Economics

Supply Curve and Elasticity of Supply

Olawunmi Omosanya - Fri, 26th April, 2019 @ 20:38: PM

What is supply?

Supply is the amount or quantity of goods and services a producer or manufacturer or supplier intends to sell at a given time and period. For instance, a producer of rice may plan to sell a bag of rice for N10,000. The quantity of rice sold by the producer over this period of time will depend on the price of his or her rice, in addition to other factors. Such additional factors may include:

  1. The quantity of rice in the market.
  2. The quality of his rice.
  3. The price substitute of rice.
  4. The demand of rice at that present moment and so on.

Note: Quantity supplied refers to the amount or number of goods supplied and services rendered.

 

Supply Curve

Image Credit: Department of Economics, University of Toronto

Supply curve is the graph that shows the correlation between the amount or quantity of goods supplied and its price over a given period of time. In this graphical representation, the quantity of goods supplied is always on the horizontal axis while the price is seen on the vertical axis. Oftentimes, before we plot this graph, we would have a table that contains the observable data showing a prior listings of the price and quantity of goods supplied. Such a table is known as the supply schedule.

When the price versus quantity supplied is plotted on a supply curve graph, we will notice that the graph is often sloped upward from left to right. This upward and left to right movement of the supply curve validates the law of supply which states that:

The suppliers are willing to offer or sell more quantity of their goods at a higher price provided all other factors are kept constant.

law of supply


Note: When other factors (not relating to price) that affect the quantity of goods supplied are present, the supply curve may shift to the right or left. Below are some instances:

  1. The availabiity of better seeds or a new pest resistant seed will increase the supply of crops from such seeds, hence; supply curve will shift to the right.
  2. Natural disasters like earthquakes and droughts will shift the supply curve to the left.
  3. Increase in the price of a substitute crop will shift the supply curve to the right.
  4. If the price of a crop will increase in the future, the supply curve will shift to the left since manufacturers and producers will prefer to sell such crop in the future.
  5. An increase in labour will shift the supply curve to the left.
  6. Any technology that will boost the amount of crop produced or the number of services rendered will shift the supply curve to the right.

 

Supply Curve Scenario

If for instance; there is an increase in the price of rice and a decrease in the price maize, the farmers will be motivated to plant more of rice and less maize. The planting of rice will directly increase the total quantity of rice in the market. The rate at which the increased price of rice (or any other goods) translates into its increased production and availability in the market is called price elasticity of supply or supply elasticity. For instance:

If a 100% increase in the price of rice translates into a 100% increase in the production and supply of rice, the supply elasticity is said to be unitary elastic and its value is equal to 1.

Similarly, if a 100% increase in the price of rice translates into a 50% increase in the production and supply (quantity) of rice, the supply elasticity is said to be inelastic and its value will be greater than zero and less than 1. In this case, the exact value is 0.5 (value of change in the quantity of rice divided by value of change in price of rice = 50/100 = 0.5).

Similarly, if a 100% increase in the price of rice translates into a 200% increase in the production and supply (quantity) of rice, the supply elasticity is said to be elastic and its value will be greater than greater than 1 and less than infinity. In this case, the exact value is 2 (value of change in the quantity of rice divided by value of change in price of rice = 50/100 = 0.5).


Note: For products that are more elastic, the supply curve will move towards the horizontal side of the graph while for the products with less elasticity, the supply curve will move towards the vertical side of the graph.

 

Elasticity of Supply

Elasticity of supply can be expressed in a variety of ways but the major way to go about it is via the change in price of commodity versus the change in the quantity supplied of such commodity. This is so because according to the law of supply, there is a direct relationship between the price of a commodity and the quantity supplied of such commodity.

Note: Apart from price, other factors that can affect the quantity of goods and services supplied may also be used to determine the elasticity of supply. Regardless of these factors, price is used in supply elasticity because it is generally considered to be the major determinant of the quantity of a commodity or service supplied. This is why supply elasticity may also be called price elasticity of supply.

Price elasticity of supply or Supply elasticity =

Es= [(Δq/q)×100] ÷ [(Δp/p)×100]
Es = (Δq/q) ÷ (Δp/p)

Where:

Es = Elasticity of supply
Δq = The change in quantity supplied
q = The quantity supplied
Δp = The change in price
p = The price


Types of Elasticity of Supply

For all commodities, the value of Elasticity of supply (Es) is not always uniform. For some commodities, the value may be greater than 1 or less than 1 or equal to 1.

Image Credit: SlidePlayer

 

  • Perfectly Inelastic Supply

Goods, services and commodities are said to be perfectly inelastic whenever a given quantity of it can be supplied, no matter the change in price. Such goods, commodities or services are considered to have zero elasticity(Es = 0). The curve lies parallel and straight to the y axis of the graph. .

 

  • Inelastic or Relatively Less-Elastic Supply

This is seen when a change in price brings about a relatively less change in the quantity of goods or services supplied. The price elasticity of these products is given a value greater than 0 and less than 1. (Es  >  0 and Es <  1).

 

  • Elastic or Relatively Greater-Elastic Supply

This is seen when a change in price brings about a relatively greater change in the quantity of goods or services supplied. The price elasticity of such products is given a value greater than 1 and a lesser value than infinity. (Es > 1 and Es < ∞).

 

  • Unitary Elastic

This is seen when a change in price brings about a corresponding and proportional change in the quantity of goods or services supplied. Unitary elasticity is equal to one, that is; (Es = 1). The curve runs straight and will pass through the center.

 

  • Perfectly Elastic supply

A service or commodity is said to be perfectly elastic when an increase in price results in an infinite or unlimited number in the quantity of commodity or service supplied, that is; (ES = ∞). Whenever there is a decrease in price, the supply of a perfectly elastic commodity or goods becomes zero. The curve is a straight line running parallel and horizontally (to the x axis).

Topics in Economics

Scale of Preference and Opportunity Cost Supply curve explained with graphical representation What is a Black Market, Its advantages and disadvantages Supply Curve and Elasticity of Supply Concept and Types of Cost



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