Friday, 19 December 2014

Elasticity of Supply, Calculation and Factors influencing it

What is elasticity?
Elasticity refers to the changes or flexibility of something in response to the changes made to other circumstances or factors affecting its performance or existence.  For example, the elastic underwears. The wear fits the body of certain fatness and dimensions. The grip of elastic enlarges or shrinks according to the dimensions and thickness of your waist or body. This nature of adoption to changes is called elasticity.

Performance of any thing, whether a product or service, is dependent on many related circumstances or assumptions. If those circumstances or conditions change, the performance or efficiency of that product or service also gets affected. So, it is elastic according to the situations.

What is elasticity of supply?
Elasticity of supply is the responsiveness of supplies to changes in the prices of those goods or services. It is mentioned in abbreviated terms as Es.

It is also known as price elasticity of supply (abbreviated as PES).

If prices of the goods or services increase, the supply quantities will also increase. If prices fall, supplies will also shrink according to the fall. This is known as price elasticity of supply

How elasticity is measured?
Elasticity is measured in terms of ratio to changes in prices. It is expressed in the ratio of percentage change in quantity supplied by percentage change in price.

PES or ES   = (%change in supply quantity)/(%change in price)

Suppose the price of potatoes increases from Rs.20 to Rs.25 a kg and the supply gets increased to 1000 kg from previous supply of 500 kg. Now, the elasticity in supply is calculated as follows:
PES = {(1000 - 500) / 500 x100} ÷  {(25 - 20) / 20 x 100} = {(500/500) x 100} ÷ {(5/20) x 100
So percentage change in supply = 100 and percentage supply in price = 25
So PES = 100 ÷ 25 = 4

There are 4 kinds of elasticity in supply.
  • If the increase in supply is more higher than the increase in prices, it is known as high elasticity of supply. (It will be always greater than one ( PES= >1)).
  • If the increase is very low as compared to increase in prices, then it is known as low elasticity of supply. (It is always less than one ( PES= <1)). 
  • If there is no change in supply quantity in spite of increase in prices, then that condition is termed as non-elasticity of supply. (The ratio will be always Zero (PES= 0)).
  • When the percentage changes in price and supply are both equal, it is known as unitary elasticity. (PES= 1) 
Factors influencing elasticity of supply
There are many factors influencing elasticity of supply. Some of them are narrated below.
  • Ability to switch over to production of those goods: If you are able to produce the increased price commodities, you can supply more quantities immediately.
  • Time factor: Availability of time for producing those goods or procuring from other places can also influence in more supply of those goods.
  • Availability of resources and factors of production: If all the factors of production are easily available to produce that commodity, you can increase the supply easily.
  • Nature of commodities: Perishable goods are more elastic as compared to more durable goods because of their preservation and maintenance from rot and destruction. 
  • Transportation facilities or mobility: If you are able to transport or move the goods easily, you can increase the supply drastically.

No comments:

Post a Comment