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Explain the degrees of elasticity of supply.

Explain the degrees of elasticity of supply.

(पूर्तिलोचका श्रेणीहरुको व्याख्या गर्नुहोस् ।)

Solution

Price elasticity of supply (Es) measures how responsive the quantity supplied is to a change in the price of a commodity. It is the percentage change in quantity supplied divided by the percentage change in price:

Es = (ΔQ / ΔP) × (P / Q)

Because price and quantity supplied move in the same direction, Es is normally positive. Depending on its value, there are five degrees of elasticity of supply, shown in the figure below.

Degrees of elasticity of supply
  1. Perfectly elastic supply (Es = ∞), panel (a): a tiny rise in price causes an infinite increase in quantity supplied, while at a slightly lower price supply falls to zero. The supply curve is a horizontal line parallel to the quantity axis. This is a theoretical case.
  2. Relatively elastic supply (Es > 1), panel (b): quantity supplied changes by a larger percentage than price. For example, a 10% price rise leads to a 20% rise in supply. The supply curve is flatter and starts from the price (Y) axis. It is common for manufactured goods whose output can be increased quickly.
  3. Unitary elastic supply (Es = 1), panel (c): quantity supplied changes by exactly the same percentage as price. For example, a 10% price rise leads to a 10% rise in supply. A straight-line supply curve passing through the origin always has Es = 1.
  4. Relatively inelastic supply (Es < 1), panel (d): quantity supplied changes by a smaller percentage than price. For example, a 20% price rise leads to only a 10% rise in supply. The supply curve is steeper and starts from the quantity (X) axis. Farm crops in the short run are an example, because Nepali farmers cannot grow more rice quickly even if its price jumps.
  5. Perfectly inelastic supply (Es = 0), panel (e): quantity supplied stays fixed whatever the price. The supply curve is a vertical line parallel to the price axis. Examples include stadium seats for a one-off match, or land in a particular location.
  6. Measurement: Es is measured by the percentage method, Es = (ΔQ / ΔP) × (P / Q), using initial values as the base, or by the arc method, which uses average price and quantity. The arc method is preferred for large changes, because it gives the same value whether price rises or falls.

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