Supply & Elasticity of Supply

PRESENTATION

ELASTICITY OF

SUPPLY

Definition Of Price Elasticity Of supply

• The change in the quantity supplied of a product due to a change in its price is known as Price elasticity of supply.

Kinds Of Price Elasticity Of supply

1) Perfectly elastic supply

2) Relatively elastic supply

3) Elasticity of supply equal to utility

4) Relatively inelastic supply

5) Perfectly inelastic supply

Let Us See Some Views On Them

Perfectly elastic supply

P

R

I

C

E

y

0 x

Perfectly elastic

supply curve

S S

When the supply for a product changes –increases or decreases even when there is no change in price, it is known as perfect elastic supply.

Relatively elastic supply

Relatively elastic supply

curve

P

R

I

C

E

supply0 x

yWhen the proportionate change in supply is more than the proportionate changes in price, it is known as relatively elastic supply.

S

S

Elasticity of supply equal to utility

Elasticity of

supply equal

to utility curve

y

x0 supply

P

R

I

C

E

When the proportionate change in supply is equal to proportionate changes in price, it is known as unitary elastic supply

S

Relatively inelastic supply

Relatively inelastic

supply curve

XO

Y

supply

P

R

I

C

E

When the proportionate change in supply is less than the proportionate changes in price, it is known as relatively inelastic supply

S

S

Perfectly inelastic supply

supplyS

Perfectly inelastic

supply curve

0

Y

X

P

R

I

C

E

When there is no change in the quantity supplied with the change in its price, it is perfectly inelastic supply

S

ALL KINDS OF supply CAN BE SHOWN IN ONE DIAGRAM AS FOLLOW

SS1

S5

Y

X0

supply

P

R

I

C

E

WHERES1) Perfectly elastic

supplyS2)Relatively elastic

supplyS3)Elasticity of supply

equal to utilityS4)Relatively inelastic

supplyS5)Perfectly inelastic

supply

S5S2

S3

S4

Measurement Of Price Elasticity Of supply

There are two methods like

1. Percentage method or proportionate method

2. Geometric method or point method

1 Percentage method or proportionate method

• (Es) = % Change in Quantity Supplied % Change in Price

• ES = ∆Q/ ∆P*P/Q

• ∆Q= change in quantity supplied.

• ∆P= change in price

• Q= initial quantity supplied.

• P= initial price of the good

Geometric method or point method

Es= Difference b/w Qty and intersect on X axis

Difference between Qty and origin

EXAMPLE

• Price of a good falls from Rs.15 to Rs.10 and the supply decreases from 100 units to 50 units. Calculate Es.

• Q=100 P= 15

• Q1=50 P1=10

• Es= P/Q*∆Q/∆P = 15/100*50/5 = 1.5

• Es> 1, it is a case of elastic supply

(5) Factors Affecting Price Elasticity Of supply

Factors Affecting Price Elasticity Of supply

• Time Factor

1.Short period - relatively less elastic

2. Long period – more elastic

. Nature of the commodity

1. Perishable goods – relatively less elastic

2. Durable goods – elastic supply

. Technique of production

1. Complex technique - inelastic

2. Simple technique – elastic

.NATURE OF INPUTS USED 1.Commonly used factors – elastic2.Specialised factors –inelastic

. Future price expectation1.price increase- inelastic 2. price decrease – elastic

. Natural constraint less elastic

. Risk Taking1.Willing to take risk- more elastic2. Unwilling to take risk- less elastic

(6) Practical Importance of the Concept of Price Elasticity Of

supply

Practical Importance of the Concept of Price Elasticity Of supply

• The concept is helpful in taking Business Decisions

• Importance of the concept in formatting Tax Policy of the government

• For determining the rewards of the Factors of Production

• To determine the Terms of Trades Between the Two Countries

Thanking You All