Supply Elasticity: Elasticity of Supply explained

Elasticity of Supply:

Let's begin with an instance:

If there is an increase in the price of rice and a decrease in the price maize, farmers will be motivated to plant more 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 termed price elasticity of supply or supply elasticity.

Consider the statements below:

• 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 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 = 200/100 = 2).

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. (The various curves for supply elasticity will be shown in the explanations below).

Elasticity of supply can be expressed in a variety of terms but the major way to go about it is via a change in price of commodity versus the change in the quantity supplied of such commodity.

According to the law of supply, there is a direct relationship between the price of a commodity and the quantity supplied of such commodity.

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 other factors that may be used as an attribute in the elasticity of supply, price is simply preferred because it is generally considered to be the major determinant of the quantity of a commodity or service supplied. For this reason, supply elasticity may also be called price elasticity of supply.

The equations below show the Price Elasticity of Supply (Supply Elasticity):

• Es = [(Δq/q)×100] ÷ [(Δp/p)×100]
• Es = (Δq/q) ÷ (Δp/p)
• Es = Elasticity of supply
• Δq = The change in quantity supplied
• q = The quantity supplied
• Δp = The change in price
• p = The price

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