Elasticity of Supply

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Definition of Elasticity of Supply:

The elasticity of supply measures a company’s ability to increase or decrease production in response to a price change. It is also referred to as the price elasticity of supply.

Detailed Explanation:

Flexibility in the manufacturing process is important in determining whether a company has an elastic or inelastic supply curve. Companies producing a good or service with an elastic supply can respond quickly to a price change. In this video, two babysitters have different elasticities of supply because their flexibilities differ. 

The mathematical formula for the elasticity of supply is: 

An elastic supply curve has a price elasticity of supply that exceeds one. Compare the supply curves below. The more inelastic supply curve is steeper and a change in price has a much smaller impact on the quantity supplied than for the elastic supply curve.

Factors that influence the elasticity of supply include:

Time: Long-term supply curves are more elastic than short-term curves because of the flexibility that time provides to respond to market changes. For example, assume a community experiences a sudden rent increase. The increase may not generate an immediate increase in housing. Up-fitting an apartment or building new ones takes time.

Availability of Inputs: If a company needs to search or wait for inputs, its supply is more inelastic than a company that has the inputs readily available. For example, compare a lawn mowing service with a hospital. The lawn mowing company would probably be able to hire additional workers in a few weeks since the work requires little skill. A hospital may take months to identify and negotiate with a highly qualified surgeon. In this case, the lawn mowing company has a more elastic supply curve than the hospital.

Ease of Storage: Some companies can increase their elasticity of supply by stockpiling parts or the final product so they can respond quickly to a price increase. Other companies do not have that flexibility. Producers that manufacture a good that is perishable or has an input with a short shelf life cannot store their final product or inventory parts as readily as other companies. 

Capacity: A company with excess capacity has a more elastic supply curve than a company that is producing at capacity because it is much easier for the company with excess capacity to increase output. A company operating near capacity may need to hire more workers or purchase additional equipment to increase production.

Dig Deeper With These Free Lessons:

Supply – The Producer's Perspective
Price Elasticity of Supply – How Does a Producer Respond To a Price Change
Factors of Production – The Required Inputs of Every Business
Price Elasticity of Demand – How Do Consumers Respond to Price Changes

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