10 Chapter.7 1. ELASTICITY OF SUPPLY Price Elasticity of Supply | measures the degree Of responsivencs in. Price elasticity of demane ae price of that product. Price Defini 2 demand for a product due to a change w the z ¢ ticity of ers are toa change in the price of good, ntity supplied to cha supply measures how responsive produ is defined as a measure of the responsiveness of qu in price, It is measured by dividing the percentare change in quantity supplied by the percentage change in price Thus the Pereentag Method formula is iss supplied tage change in price Percent Pere Is AQ» ONP Ir can also be written as by. 2. CATE sORIES OF PRICE ELASTICITY OF SUPPLY There are five degrees of price elasticity of supply. They are discussed in brief as under Perfectly Elastic Supply (Elasticity = 7) ()) Perfectly elastic supply. Supply curve in graph. (a) is perfectly elastic (horizontal), The firm will supply any amount of ; y any output at Rs. 4 . 4 per unit, If the price falls below Rs. 4 (sai ai ay Rs. 3.5) 8 “ ae the quantity supplied falls 1 zero = ce is too fo Whe matter ten 1ow to sustain Any producer in ° “SUCHY Of supply is infinite Fig: 7.1(a) aun 8 >(>) Perf astic supply. A perfectly inelastic upply represents a situation in which sellers sell 1 fixed “quantity of good for sale. The price } to Rs. 8 has not led to increase from Rs. increase. in quantity supplied. The quantity supplied is totally unresponsiveness to changes in price. The supply curve is vertical ~ Es = 0 tie supply. In case of unit elasticity of (3) Unit ela supply. the percentage change in price brings about the same percent change in’ quantity supplied of a good. In figure 7.1(¢) doubling the price of a good from Rs.4 to Rs.8 per unit doubles the quantity supplied. from 40 to 80 ‘units E (4) Elastic supply. When the percentage increase od brings about a larger in the price of a percehtage increase in the supply of a good, the supply of a good wsaid to elastic. Fig. 7.1(d) shows. a 25% increase in the price of a good (Rs. 4 to Rs. 5). eauses a 100% increases in the supply of goods (Irom 40 to 80 units per day) (Es > 1). The supply curve has a flatter slope. (5) Inelastic supply. When the percentage change in price of a good. causes a smaller percentage in quantity supplied, the supply is said to be inelastic (Es < 1). In fig. 7.1(e) there is an 100% increase in the price of good (from Rs. 4 td Rs. 8) but it brings a 25% increase in the quantity Supplied (40 to 50 units per day). The supply Curve is steeply sloped. or My Perfectly Inelastic Supply (Elasticity s ga 8 a4 Figs7.(0) “Oven Unit-elastic Supply (Elasticity = 1) a os s g8 ° 2 a4 : _ ° 40 ity 20 Q Fig: 7.1(c) Quantity Elastic Supply Y (Elasticity > 1) a é 5) a 4}- oO 40, sola tity Fig: 7.1(d) Quantity Inelastic Supply (Elasticity < 1) _ s gst ° 2 a] ~ x 9 40 50 Quantity 9 Fig: 7.1(e)ton the curve ; ly at any poin Ply curve can 4, of elas Met int cof the curve under consideration, Ir the gent to the ‘i ica int and its v: eateay then supply is elastic at that Point and its value Will be went meets the vertica se it touches, the horizontal axis, then the Supply of the between one and infinity. In and its value will lie between zero and one. Any straight sod is inclastic at Soeaithe origin will have unitary clastic, + The category Not judged by dr awing @ t good i line supply curve ¢ 3, DETERMINANTS OF PRICE ELASTICITY OF SUPPLY The main factors which determine the degree of price elasticity of supply are as he main fa under: ) Lime period. Time is the most significant factor which affects the elasticity of supply. If the price of a commodity rises and the producers have enough time to make adjustment in the level of output, the clasticity of supply will be more elastic, Ir the time period is short and the supply cannot be expanded ‘after a price increase, the Vv, supply is relatively inelastic, f2) Al {o store output, The goods. which can be safety stored have relatively elastic supply over the goo. «ds which are perishable and do not have storage facilities, 3) Factor mobili If the factors of production éan be easil: another, it will affect elasticity of supply. The higher th greater is the elasticity of supply.of the goad and vice ly moved from one use to © mobility of factors, the versa, 4) Changes in marginal cost of production. If with cost incfeases and marginal return decline: clastic to that extent. the exy Pansion of output, marginal s. the price el, asticity of supply will-be less 5) Excess supply. When there is excess ca casily to take advantage of the rising Pl production is already upto the maxim prices will not affect supply in the short pacity and the Producer can increase rices, the supply is more elastic. In case the um trom the existing resources, the rising Period. The supply will be more inelastic. ucture facilities SPonse 0 the rise in pric output (6) Availability of infrastructure facilities expanding output of a particu of supply will be relatively m Nd) Agricultuyal_or industrial SI infrastr ‘ar good in re: ‘ore elastic, are available for es, the elasticity griculture, time*is required to increase 7 in Fresponse 7 _ quired to incre Rainiyeaie Hise in prices at 8oods. The ‘supply of agricultural goods is ; : . : comparatively eqs “pPly of manufact tured consumer goods, it is CONSUME EOOUS is fairly morgen riod. Therefore, the supply of Ten achinery. the supply te sen " supply of aeroplanes or any othet heavy machinery. relat as it takes time to manufactureie QUESTIONS (1) Define elasticity of supply. What are the various categories of elasticity of supply? ela of supply (2) Explain the factors which determine elasticity of supply (3) “Plasticity of supply increases with time”. Do you agree with this statement? (4) “the category of elasticity of supply at any point on a supply curve may be judged hy drawing a tangent to the point of a curve.” Explain with the help of diagrams. Short Answer Questions: (5) IF the price of milk rises from Rs, 2 t0 Rs, 2.20. the quantity supplied inereases from 100 million gallons to 120 million gallons per day. Calculate the price elasticity of supply. Ans: (1). Increase in price of milk from Rs. 2 to Rs. 2.20 = 10 Increase in quantity supplied from 100 million gallons to 120 million gallons ~ 20%, ‘The price elasticity of supply: is = 2.0. % change in quantity supplied % change in price Es.