key term - Relatively Elastic Supply

Definition

Relatively elastic supply refers to a situation where the quantity supplied of a good or service is highly responsive to changes in price. When supply is relatively elastic, even small changes in price can lead to large changes in the quantity that producers are willing to sell. This elasticity can be influenced by factors such as the availability of resources, production time, and the ability of suppliers to adjust their output quickly.

5 Must Know Facts For Your Next Test

1. Relatively elastic supply means that when prices rise, suppliers significantly increase their quantity supplied, indicating a strong responsiveness.
2. Goods with many substitutes or flexible production processes tend to have relatively elastic supply.
3. Producers may face fewer constraints in increasing output in industries like agriculture during harvest season, leading to more elastic supply.
4. The time frame considered plays a crucial role; supply tends to be more elastic in the long run as firms can make adjustments to production capacity.
5. Elasticity can be quantified using the formula: Price Elasticity of Supply = (% Change in Quantity Supplied) / (% Change in Price).

Review Questions

• How does relatively elastic supply impact producer behavior during price increases?
  • When prices increase and supply is relatively elastic, producers respond by significantly increasing their output. This behavior is driven by the potential for higher profits, as they can sell more units at a higher price. Industries with flexible production capabilities can quickly adjust their output levels, making them more responsive compared to industries with rigid production processes.
• Evaluate the importance of understanding relatively elastic supply for businesses making pricing decisions.
  • Understanding relatively elastic supply is critical for businesses as it helps them anticipate how changes in pricing will affect overall sales volume. If a product has a relatively elastic supply, businesses may choose to raise prices knowing that suppliers will quickly increase quantity supplied to meet demand. Conversely, if they face inelastic supply conditions, they must consider how limited availability might restrict their ability to capitalize on price increases.
• Analyze the effects of technological advancements on the relative elasticity of supply in certain industries.
  • Technological advancements often lead to improved production methods, which can increase the relative elasticity of supply in various industries. For instance, automation and innovative manufacturing techniques allow producers to adjust output levels more rapidly in response to price changes. This increased efficiency enables businesses to meet demand fluctuations more effectively, resulting in a more elastic supply curve. Consequently, firms that leverage new technologies can better position themselves within competitive markets by responding swiftly to consumer preferences and price signals.

Related terms

Price Elasticity of Supply:

A measure that shows how the quantity supplied of a good changes in response to a change in its price, typically expressed as a percentage.

Inelastic Supply: A situation where the quantity supplied is not very responsive to changes in price, meaning that even significant price changes lead to only small changes in quantity supplied.

Short-Run vs Long-Run Supply: The distinction between supply responsiveness in the short run, where producers may have fixed capacities, versus the long run, where they can adjust all resources and production processes.