Supply and Elasticity

8) SUPPLY AND ELASTICITY The SUPPLY CURVE indicates the quantities of a good which producers are willing to offer for sale at different prices during a given period of time. The curve normally slopes UPWARDS, as sellers offer larger amounts for sale at high prices than at low prices. Again, the distinction between an EXTENSION/CONTRACTION of supply (a movement ALONG the supply curve, following a change in PRICE) and an INCREASE/DECREASE in supply (= a movement to a NEW supply curve) must be remembered. ELASTICITY OF SUPPLY refers to the ability of producers to adjust supply to a change in PRICE, and is thus basically a SHORT-TERM idea. It can be measured by the formula: % CHANGE IN QUANTITY SUPPLIED TO A MARKET IN A GIVEN PERIOD % CHANGE IN PRICE In general, the E of S will tend to be GREATER, the LONGER the time period under question, and the greater the degree of SUBSTITUTABILITY between the factors of production. In other words, each short run supply curve is succeeded by another of greater elasticity. The following TIME PERIODS should be committed to memory. 1) VERY SHORT RUN no change in output possible (resort to STOCKS only). 2) SHORT RUN-variable factors only can be increased. 3) LONG RUN - ALL factors can be increased (i.e. SIZE of firm may alter). 4) VERY LONG RUN-change in TECHNIQUES of production possible. NONE OF THE ABOVE CAN BE REGARDED AS A SPECIFIC PERIOD OF TIME. The following basic supply curve shapes should also be known. V E of So perfectly inelastic) E of S41 E of S-1 E of S (inelastic) (unit (perfectly olasticity) elastic) E of S>1 (elastic) Change in price has Q Q % change in price is Change in price Q % change in price is % change in price GREATER THAN EQUALS % change % change in Q.S. in OS NO EFFECT on supply LESS THAN causes supply to change in QS DISAPPEAR NOTE IN PARTICULAR THAT ANY SUPPLY CURVE WHICH IS A STRAIGHT LINE THROUGH THE ORIGIN (middle diagram above) IS OF UNIT ELASTICITY. Curves that goos thout goes thragh ongen won't be