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Price elasticity of supply

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Topic updated on 02/14/2019 09:52am

Calculations of elasticity of supply on a point of a supply curve is explained as point of elasticity.

 

The point elasticity of supply can be illustrated by the following formula / equations

E =  { (ΔQS/ΔP) X (P/QS)
Axe elasticity of supply is explained as elasticity between two points of a supply curve in given period of time.
Arc elasticity of supply is calculated using the following formula.

 { (ΔQS/ΔP) X (P1+ P2 /QS1 +QS2) }

Five range of price elasticity of supply can be illustrated as follows.

  •  Perfect inelastic supply
  • Inelastic supply
  • Unitary elastic supply
  • Elastic supply
  • Perfect elastic supply

 

  • The supply curve with a positive intercept illustrates elastic supply.
  • The supply curve with a negative intercept illustrates inelastic supply
  • The supply curve passing through the origin illustrates unitary elasticity of supply.

In addition to the above situations there is perfect inelastic supply and perfect
elastic supply also.
If the supply curve is parallel to the vertical axis or the price axis price elasticity of supply is perfectly inelastic, the coefficient of elasticity of supply is zero(0).
If the supply curve is parallel to the horizontal axis or quantity axis , then the price elasticity is perfectly elastic or infinity.
Quantity supply is changed variously to a change in price because of different factors are effective.

The following are determinants of price elasticity of supply.

  • Mobility of factors of production.
  • Time period to supply goods
  • Ability to keep stocks and production capacity
  • Nature of good.

When implementing economic policies supply elasticity is very important.
Change in price to a change in the nature of a good is decided according to supply
elasticity.
Supply elasticity affects to divide tax incidence between consumer and producer when implementing taxes.
If price elasticity of supply is more elastic more benefits of a subsidy are enjoyed by the consumer
When supply of factors get perfectly elastic the total factor earnings will consist of transfer earnings.
When supply of factors get perfectly inelastic the total factor earnings will consist of economic rent.
When supply of factors get unitary elastic the total factor earnings will consist of both transfer earnings and economic rent equally.
Transfer earning and economic rent can be shown by the digams below.

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