The elasticity of supply is a measure of the responsiveness of an industry or producer to changes in demand for its product. The availability of critical resources, technological innovation and the number of competitors producing a product or service are also factors.
Key points to remember
- The flexibility of production levels affects the elasticity of supply.
- The availability of critical resources is a factor.
- The number of competitors in an industry affects its elasticity of supply.
Understanding the elasticity of supply
The elasticity of supply is a measure of a producer’s ability to effectively cope with changes in demand. A number of factors can affect it.
- Availability of resources is a factor. If a business depends on an increasingly scarce resource to produce its product, it may be unable to increase production when demand increases. In addition, the resource will become more and more expensive, forcing a corresponding increase in the producer price or a decrease in its production, or both.
- Technological innovation is a factor in many industries. More efficient production reduces costs and enables greater production numbers at lower prices.
- The number of competitors is a factor. An increase in the number of suppliers makes the price of a product or service more elastic. If one supplier cannot meet the demand, others will rush to fill the void.
- Flexibility is an important factor. If a resource becomes scarce, can another resource be substituted? Can production be accelerated quickly in response to increased demand? Efficient producers can respond more quickly to increased demand.
Taking into account price elasticity
The price of any product or service is also elastic or inelastic with respect to its offer. This is determined by measuring the percentage change in its supply and the percentage change in its price over a period of time. Dividing the change in supply by the change in price gives a numerical value. If this number is greater than one, the product has price elasticity. If it is less than one, the product is inelastic.
Technological innovation can reduce the elasticity of supply. More efficient production reduces costs and enables increased production.
If the supply is elastic, so is the price. A larger offer of a product or service reduces its cost. A rarer supply drives up prices.
The most notorious example of price elasticity can be seen in the price of gasoline at the pump. In 2008, demand for fuel skyrocketed around the world, with sharp increases in developing countries like China. the price of crude rose to over $ 3 per gallon, while the price to US consumers rose to over $ 100 per barrel. With the increase in production and stocks, prices have fallen off a cliff. At the start of 2009, the price of crude was around $ 45 a barrel and the consumer price was less than $ 1.75.
The price of gasoline is elastic. That is, consumers have to buy it regardless of the price. Its offer is also elastic. If demand increases, industry will increase production to meet it.