The Supply Elasticity

Elasticity of Supply

Definition of Elasticity:

Ever think of finding out the comparison level of two variable? Well, Elasticity is the best option. Elasticity refers to the measure of the sensitivity of one variable if the other changes. For example, Advertising elasticity is the relationship between the ad budget and the changes in sales volume.

Economists are often  interested in elasticity of demand and elasticity of supply.

The scenario of elasticity can be of three types mainly
1. When elasticity is greater than 1 i.e elastic situation
2. When elasticity is less than one i.e inelastic situation
3. When elasticity is equal to one i.e unitary elastic situation

Elasticity has various determinants which are as below

Elasticity is one of the prime factor to consider in managerial as well as business decision making.
It helps in deciding proper price, channeling the supply and handling the demand to make business successful.

Elasticity of Supply

The elasticity of supply is a measure of 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.

Why it matters

Elasticity of supply tells us how fast supply responds to quantity demand and price increase. When there is a popular product that is in short supply for instance, the price may rise as a result. The manufacturers of that product will increase output (the supply) to keep up with the demand. The higher the elasticity of supply, the faster the supply will increase when demand and price increase. Some goods/services are more supply inelastic however, whenever there is a supply shortage. Limited tickets to a concert may have a very inelastic supply. The price of the concert tickets can be raised to any amount, but because there is a fixed number of seats and tickets, the supply (of tickets sold) may not be increased by much if at all.

Supply Determinants

• Flexibility of inputs

When you go to hotel, the most important person is chef. If chef is absent nothing will go, chef cant be replaced.

• Mobility of inputs

Theater group, they will be performing in different countries, different events. But the machineries are not easy to relocate.

• Durability

• Time

Drivers are elastic inputs but if you have a urgent meeting and that driver become unavailable for that time period that moment he cant be replaced.

• Ability to produce substitutes inputs

If anything can be substituted then inelastic goods is turned into elastic.

DEMAND AND SUPPLY

DEMAND
Demand refers to the number of goods or services the consumer willing to purchase at any given period of time.

LAW OF DEMAND
The law of demand states the price rises when the quantity demand falls and vice versa other things remaining constant.
Example: Suppose, the price of a potato tends to rise in that case people will buy less quantity of potato. On the other hand, if the price of the potato falls, in this case, people will buy potatoes in bulk so that to avoid buying potatoes in huge amount afterwards.

DEMAND CURVE
The demand curve is the graphical representation of the law of demand. It is drawn with price in the vertical axis and quantity demand on the horizontal. The graph represents the curve as downward sloping from left to right because the price is inversely proportional to quantity demand i.e lower the price higher the quantity demand and vice versa.

                                             

SUPPLY
Supply refers to the willingness of the seller or producer to sell good or services at different prices.

LAW OF SUPPLY
Law of supply states that the increase in the price results in the increase in the quantity supply and vice versa other things remaining constant.

Example: There is a drought and very few strawberries are available. More people want the strawberries than there are berries available. The price of strawberries increases dramatically.

SUPPLY CURVE

The supply curve is a graphical representation of the law of supply. It is drawn with price in the vertical axis and quantity supply in the horizontal axis. The graph represents the curve as upward sloping from left to right because the price is directly proportional to quantity supply i.e higher the price, higher the quantity supply and vice versa other things remaining constant.

           

                           

FACTORS AFFECTING DEMAND OF PRODUCT
1. Price of the commodity
2. Price of Related Goods
3. Income of the Consumer
4. Taste and Preference
5. Future price Expectations

FACTORS AFFECTING SUPPLY OF PRODUCT
1. Price of the given commodity
2. Cost of Production
3. Technology
4. Taxation Policy
5. Factors of Production
6. Objectives of the firm