Price elasticity of supply measures the responsiveness of the quantity supplied of a good or service to changes in its market price. According to basic economic theory, the supply of a good will increase when its price rises. Conversely, the supply of a good will decrease when its price decreases. This happens because producers want to take advantage of a rise in price, so they increase production of their goods and services until demand is exceeded—at which time prices begin to fall. Producers then decrease output to match the price decline.
Key Facts
- Relatively Elastic Supply:
- Relatively elastic supply refers to a situation where the quantity supplied is highly responsive to changes in price.
- When the price of a product increases, suppliers can quickly and significantly increase the quantity supplied.
- On the other hand, when the price decreases, suppliers can quickly and significantly decrease the quantity supplied.
- This type of supply elasticity is represented by a relatively steep supply curve.
- Examples of relatively elastic supply include luxury goods and non-necessary items.
- Relatively Inelastic Supply:
- Relatively inelastic supply refers to a situation where the quantity supplied is not very responsive to changes in price.
- When the price of a product increases, suppliers are unable to significantly increase the quantity supplied.
- Similarly, when the price decreases, suppliers are unable to significantly decrease the quantity supplied.
- This type of supply elasticity is represented by a relatively flat supply curve.
- Examples of relatively inelastic supply include essential goods like food and gas.
- Unitary Elastic Supply:
- Unitary elastic supply refers to a situation where the percentage change in quantity supplied is equal to the percentage change in price.
- When the price of a product increases by a certain percentage, suppliers increase the quantity supplied by the same percentage.
- Similarly, when the price decreases by a certain percentage, suppliers decrease the quantity supplied by the same percentage.
- This type of supply elasticity is represented by a supply curve that passes through the origin.
- Examples of unitary elastic supply include some agricultural products and raw materials.
Types of Supply Elasticity
There are three main types of supply elasticity: relatively elastic supply, relatively inelastic supply, and unitary elastic supply.
Relatively Elastic Supply
Relatively elastic supply refers to a situation where the quantity supplied is highly responsive to changes in price. When the price of a product increases, suppliers can quickly and significantly increase the quantity supplied. On the other hand, when the price decreases, suppliers can quickly and significantly decrease the quantity supplied. This type of supply elasticity is represented by a relatively steep supply curve. Examples of relatively elastic supply include luxury goods and non-necessary items.
Relatively Inelastic Supply
Relatively inelastic supply refers to a situation where the quantity supplied is not very responsive to changes in price. When the price of a product increases, suppliers are unable to significantly increase the quantity supplied. Similarly, when the price decreases, suppliers are unable to significantly decrease the quantity supplied. This type of supply elasticity is represented by a relatively flat supply curve. Examples of relatively inelastic supply include essential goods like food and gas.
Unitary Elastic Supply
Unitary elastic supply refers to a situation where the percentage change in quantity supplied is equal to the percentage change in price. When the price of a product increases by a certain percentage, suppliers increase the quantity supplied by the same percentage. Similarly, when the price decreases by a certain percentage, suppliers decrease the quantity supplied by the same percentage. This type of supply elasticity is represented by a supply curve that passes through the origin. Examples of unitary elastic supply include some agricultural products and raw materials.
Conclusion
The type of supply elasticity that a good or service exhibits can have a significant impact on the market for that good or service. For example, a good with a relatively elastic supply is likely to experience a smaller change in quantity supplied than a good with a relatively inelastic supply when the price changes. This can lead to different outcomes in terms of market equilibrium and consumer welfare.
References
- https://study.com/learn/lesson/price-elasticity-of-supply.html
- https://www.geeksforgeeks.org/types-of-elasticity-of-supply/
- https://www.investopedia.com/ask/answers/040615/how-does-price-elasticity-affect-supply.asp
FAQs
What is supply elasticity?
Supply elasticity measures the responsiveness of the quantity supplied of a good or service to changes in its market price.
What are the three main types of supply elasticity?
The three main types of supply elasticity are relatively elastic supply, relatively inelastic supply, and unitary elastic supply.
What is relatively elastic supply?
Relatively elastic supply refers to a situation where the quantity supplied is highly responsive to changes in price. When the price of a product increases, suppliers can quickly and significantly increase the quantity supplied. On the other hand, when the price decreases, suppliers can quickly and significantly decrease the quantity supplied.
What is relatively inelastic supply?
Relatively inelastic supply refers to a situation where the quantity supplied is not very responsive to changes in price. When the price of a product increases, suppliers are unable to significantly increase the quantity supplied. Similarly, when the price decreases, suppliers are unable to significantly decrease the quantity supplied.
What is unitary elastic supply?
Unitary elastic supply refers to a situation where the percentage change in quantity supplied is equal to the percentage change in price. When the price of a product increases by a certain percentage, suppliers increase the quantity supplied by the same percentage. Similarly, when the price decreases by a certain percentage, suppliers decrease the quantity supplied by the same percentage.
What are some examples of relatively elastic supply?
Examples of relatively elastic supply include luxury goods and non-necessary items.
What are some examples of relatively inelastic supply?
Examples of relatively inelastic supply include essential goods like food and gas.
What are some examples of unitary elastic supply?
Examples of unitary elastic supply include some agricultural products and raw materials.