Elastic Supply

Definition

Elastic supply refers to a situation where the quantity supplied of a good or service is highly responsive to changes in its price. In other words, a small change in price leads to a relatively large change in the quantity supplied.

5 Must Know Facts For Your Next Test

1. Elastic supply is characterized by a supply curve that is relatively flat, indicating a large change in quantity supplied for a small change in price.
2. Factors that contribute to elastic supply include the ease of increasing production, the availability of resources, and the time horizon being considered.
3. Elastic supply is more common for goods and services where producers can quickly adjust their output in response to price changes, such as agricultural commodities or certain consumer goods.
4. The degree of price elasticity of supply is influenced by the availability of alternative production methods, the ease of storing the good or service, and the ability to shift resources to other uses.
5. Elastic supply can have important implications for market equilibrium, price stability, and the distribution of the gains from trade between producers and consumers.

Review Questions

• Explain the relationship between the price elasticity of supply and the slope of the supply curve.
  • The price elasticity of supply is directly related to the slope of the supply curve. A supply curve with a flatter slope, indicating a more elastic supply, means that a small change in price will lead to a relatively large change in the quantity supplied. Conversely, a steeper supply curve, indicating a more inelastic supply, means that a large change in price is required to elicit a significant change in the quantity supplied.
• Describe the factors that contribute to elastic supply and how they influence the responsiveness of quantity supplied to price changes.
  • Several factors can contribute to elastic supply, including the ease of increasing production, the availability of resources, and the time horizon being considered. Producers who can quickly adjust their output in response to price changes, such as those in the agricultural or consumer goods industries, are more likely to have elastic supply. Additionally, the availability of alternative production methods, the ability to store the good or service, and the ease of shifting resources to other uses can all increase the elasticity of supply.
• Analyze the implications of elastic supply for market equilibrium, price stability, and the distribution of gains from trade between producers and consumers.
  • Elastic supply can have significant implications for market equilibrium, price stability, and the distribution of gains from trade. In a market with elastic supply, a change in demand will result in a smaller change in price, as producers can more easily adjust their output to meet the new demand. This can contribute to greater price stability and a more even distribution of the gains from trade between producers and consumers. However, if supply becomes too elastic, it can also lead to greater price volatility, as producers may quickly adjust their output in response to small price changes. Understanding the degree of supply elasticity is crucial for policymakers and market participants to make informed decisions and anticipate the effects of changes in market conditions.

Related terms

Price Elasticity of Supply: A measure of the responsiveness of quantity supplied to a change in price, calculated as the percentage change in quantity supplied divided by the percentage change in price.

Inelastic Supply: A situation where the quantity supplied of a good or service is not very responsive to changes in its price, meaning a large change in price leads to a relatively small change in quantity supplied.

Supply Curve: A graphical representation of the relationship between the price of a good or service and the quantity supplied, with price on the vertical axis and quantity on the horizontal axis.