Elasticity of Supply Definition and Ways to Calculate it:- Given an increase in the price of a product (or service), the suppliers usually react by increasing the quantity offered. Similarly, in the face of a decrease in the price of a product, the producers of the product usually react by decreasing the quantity offered. In case of some products, the reaction may be large, in other cases small. How to measure whether these variations are large or small?
Elasticity of Supply Formula
The price elasticity of supply tells us in what proportion the quantity offered varies according to a proportional variation in price, that is:
Price elasticity of supply = proportional variation in quantity offered / proportional variation in price.
Epo = (variation of Qo / Qo) / (variation of P / P) = (ΔQ or / Q o ) / (ΔP / P)
Then, the value assumed by the price elasticity of supply indicates the percentage in which the quantity offered changes from 1% in the price.
Ways to Calculate the Supply Elasticity
Arc elasticity – Point elasticity
Elasticity Offer Initial Point
Suppose that the price increases from $ 3 to $ 4 and the amount increases from 50 to 60. If we take the starting point as the starting point, the variation of the quantity is: 10/50 = 20% and the price variation is (4- 3) / 3 = 33%.
The elasticity is 0.6.
Supply Arch Elasticity
What happens if the price goes down instead of rising? In this case, if we take $ 4 as the starting point, the change in quantity is (-10/60) = – 0.167. The amount offered decreases from 60 to 50.
The variation in price is -1 / 4 = -0.25. The price drops from $ 4 to $ 3.
The elasticity, measured at the lowest price is -0.167 / -0.25 = -0.67.
What price should we take as a starting point? To solve this problem, the arc elasticity is calculated.
The arc elasticity takes into account the average quantities and prices.
Epo = (change in quantity / average quantity) / (change in price / average price)
E (Q1 – Q2) / ((Q1 + Q2) / 2)) / ((P1 – P2) / ((P1 + P2) / 2))
In our exercise:
E = (10/55) / (1 / 3.5) = 0.6363
Offer Point Elasticity
E = (ΔQ o / Q o ) / (ΔP / P)
May be rewritten as:
E = (ΔQ o / ΔP). ( P / Q)
If the supply is a continuous function, the quantity can be derived according to the price:
E = (dQ / dP) (P / Q)
Cross Elasticity of Supply
The proportional change in the quantity of the offered product is measured by the cross-elasticity of supply.
E 1 2 = ΔQ s 1 / Q s 1 / ΔP 2 / P 2
Lets looks at the cross-elasticity of supply, we can determine whether two goods are substitutes or complementary in production.
2 goods are complementary in production, when they occur together. For example naphtha, asphalt, kerosene and other petroleum products.
More from Business Study Notes:- Elasticity of Demand
When the price of a complementary good increases in production, the quantity of the good we are analyzing increases.
Another example of complementary goods in production is milk and cream. If the price of milk increases (suppose that the demand for external factors increases), it will increase not only the quantity of milk offered, but also the quantity of cream offered.
The cross-elasticity of supply of complementary goods in production is positive
Tow goods are substitutes in production when they use the same resources. When the price of a substitute good increases in production, the offered quantity of the substitute good falls. For example, if the price of soybeans falls, many producers will stop producing soybeans and will use those lands to produce corn. Then the amount of corn offered will increase. The cross-elasticity of substitutes in production is negative.
Determinants of Supply Elasticity
The price elasticity of supply depends mainly on:
1- Term that is being analyzed: in the long term, the producer has more capacity to modify the production, therefore the elasticity is greater.
2- Availability of raw materials: if the supplies are abundant and easy to obtain, the elasticity will be greater.
3- Complexity of production: when the technology is simple and easy to replicate, the supply elasticity is greater.