ELASTICITY OF SUPPLY
WEEK SIX
ELASTICITY OF SUPPLY
CONTENT
- Meaning of Elasticity of Supply.
- Formula for Calculating Elasticity of Supply.
- Graphical Illustration of Elasticity of Supply.
DEFINITION – Elasticity of supply can be defined as the degree of responsiveness of change in quantity supplied as a result of change in price. Elasticity of supply measures the extent to which the quantity of a commodity supplied by a producer changes as a result of a little change in the price of the commodity.
MEASUREMENT OF ELASTICITY OF SUPPLY – Elasticity of supply can be measured or calculate by using the co-efficient of price elasticity of supply. The formula used in calculating the elasticity of supply is :
Elasticity of supply (ES) = % change in supply
% change in price = %∆QS
% ∆P where ∆ = Change
QS = Quantity supplied
P = Price
% = Percentage
The table below shows the relationship between prices of goods and the unit of commodity supplied.
Price (N) Quantity Supplied
9 850
10 1000
11 1,150
- Calculate the elasticity of supply when price falls from N10.00 to N9.00 State whether the supply in (iii) above is elastic or inelastic (WASSCE 1994)
New Qty – Old Qty x 100
Old Qty 1
Old Quantity = 1000
New Quantity = 850
New – Old x 100
Old 1
850 – 1000 x 100
1000 1
150 x 100 = 15%
1000 1
Old Price = N10
New Price = N9
New Price – Old Price x 100
Old Price 1
9 – 10 x 100 = 1 x 100 = 10%
10 1 10 1
Elasticity of Supply = 15 = 1.5
10
EVALUATION
- Define elasticity.
- State the formula for calculating price elasticity
TYPES OF ELASTICITY OF SUPPLY
- Perfectly (Zero) Inelastic Supply: Supply is said to be perfectly inelastic if a change in price has no effect whatsoever on the quantity of commodity supplied. In this case, elasticity is equal to zero, E = 0
Price s
10
5
O q1 Qty
- Fairly Inelastic Supply: Supply is said to be inelastic, if a change in price leads to a smaller or slight change in the quantity of goods supplied. In this case, elasticity is less than one but greater than zero, E > 0 < 1 s
Price
10
5
O 10 12 Qty
- Unity or Unitary Elastic Supply: Supply is said to be unitary when a change in price leads to an equal change in the quantity of goods supplied. In other words, a 5% change in price will equally lead to a 5% change in supply. In this case, elasticity of supply is equal to one, E = 1.
s
Price
10
5
O 10 15 Qty
- Fairly Elastic Supply: Supply is said to be fairly elastic if a small change in price leads to a greater change in the quantity of commodity supply. In this case, elasticity is greater than one but less than infinity, E > 1 < o0.
Price s
10
5
O 25 30 Qty
- Perfectly ( Infinitely ) Elastic Supply: Supply is said to be perfectly elastic when a change in price brings about an infinite effect on the quantity of goods supplied. In other words, a slight increase in price can make producer to increase the supply of the commodity, while a slight decrease in price will make producer to stop the supply of the commodity. In this case, elasticity is equal to infinity, E = o0.
Price
FACTORS AFFECTING ELASTICITY OF SUPPLY
- Cost of Production: The low cost of production normally results in elastic supply, and while the high cost of production results in inelastic supply.
- Nature of Goods: While durable goods are inelastic due to their nature, perishable goods are elastic in supply.
- Cost of Storage: Producer will supply all their goods to the market if the cost of storage is very thereby making the supply to be elastic, and vice – versa.
- Time: This relates mainly to agricultural produces which remain for a long time in the farm before they are harvested. Before their harvest, their supply is inelastic but after harvest, it becomes elastics.
- Market Discrimination: Elasticity of supply of a commodity depends on where it is sold. When few commodities are sold at a particular location as a result of lower price, such commodity can be taken to another location where the price are higher. In this case, supply is elastic and vice – versa.
- Availability of Storage Facilities: The availability of storage facilities leads to inelastic supply after harvest, while non – availability of storage facilities leads to elastic supply.
EVALUATION
- Define price elasticity of supply
- State the formula for calculating price elasticity
READING ASSIGNMENT
- Amplified and Simplified Economics for SSS by Femi Longe Page 284 – 288
- Comprehensive Economics by J.U. Anyaele page 130 – 134
GENERAL EVALUATION QUESTIONS
- Explain any five reason why a joint stock company is preferable to a one – man business.
- Why is the small scale traders important in West Africa?
- Distinguish between: (a) want and demand, (b) economic resources and non – economic resources
- What is unemployment?
- Explain any three types of unemployment.
WEEKEND ASSIGNMENT
- If the co-efficient of elasticity of supply is 0.3, then the supply is……….. (a) fairly inelastic (b) perfectly elastic (c) fairly elastic (d) perfectly inelastic
- Price elasticity of supply measures the responsiveness of quantity supplied to…. (a) changes in suppliers’ income (b) changes in prices of other commodities (c) a change in the price of the commodity (d) a change in the demand for the product
- The price elasticity co-efficient indicates…… (a) how far business can reduce cost (b) the degree of competition (c) the extent to which supply curve shifts (d) consumer responsiveness to price changes
- The equilibrium price of mangoes is #100. If the price falls to 50k, there will be……….. (a) an excess supply (b) no seller in the market (c) a shortage in supply (d) a surplus in the market
- When the price of a given commodity falls from #100 to #90, the quantity supplied reduces from 60 to 50 units. From this, we can conclude that the product’s……… (a) supply is elastic (b) supply is inelastic (c) supply is perfectly inelastic (d) supply is perfectly elastic
SECTION B
- What is price elasticity of supply?
- State the formula for the calculation of the coefficient of price elasticity of supply
