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, suppliers are able and willing to adjust the amount they offer for sale in the market based on fluctuations in the prevailing price.

5 Must Know Facts For Your Next Test

1. Elastic supply is characterized by a supply curve that is relatively flat, indicating that suppliers are willing to sell a significantly larger quantity at a slightly higher price.
2. Factors that contribute to elastic supply include the ability to quickly adjust production, the availability of spare capacity, and the ease of substituting inputs.
3. Elastic supply is important for the efficient functioning of the market system, as it allows the market to quickly adjust to changes in demand and reach a new equilibrium price and quantity.
4. In the context of the market system as an efficient mechanism for information, elastic supply ensures that producers can respond to price signals and allocate resources accordingly.
5. Elastic supply is a key concept in understanding price elasticity of supply, as it determines the responsiveness of quantity supplied to changes in price.

Review Questions

• Explain how elastic supply contributes to the efficient functioning of the market system.
  • Elastic supply allows the market to quickly adjust to changes in demand by enabling producers to respond to price signals and adjust their quantity supplied accordingly. This responsiveness helps the market reach a new equilibrium price and quantity, ensuring the efficient allocation of resources. With elastic supply, the market can efficiently convey information about changes in demand through price fluctuations, and producers can use this information to make informed decisions about production and resource allocation.
• Describe the relationship between elastic supply and price elasticity of supply.
  • Elastic supply is directly related to the concept of price elasticity of supply. Price elasticity of supply measures the responsiveness of quantity supplied to changes in price, and it is this responsiveness that defines whether a supply is considered elastic or inelastic. Specifically, an elastic supply is characterized by a high price elasticity of supply, meaning that producers are willing and able to significantly increase the quantity supplied in response to a relatively small increase in price. This relationship between the elasticity of supply and the price elasticity of supply is a crucial factor in understanding how markets function and how producers make decisions.
• Analyze the role of elastic supply in the context of the market system as an efficient mechanism for information.
  • Elastic supply is essential for the market system to function as an efficient mechanism for information. When supply is elastic, changes in demand are quickly reflected in price changes, which in turn signal to producers the need to adjust their quantity supplied. This responsiveness allows the market to efficiently allocate resources and reach a new equilibrium. Without elastic supply, the market would be unable to effectively convey information about changes in demand through price signals, leading to suboptimal resource allocation and a less efficient overall market system. By enabling producers to respond to price changes, elastic supply ensures that the market system can effectively gather and disseminate information, facilitating the efficient coordination of economic activities.

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 changes by a smaller percentage than the change in price, indicating that suppliers are less responsive to price changes.

Constant Elasticity of Supply: A scenario where the price elasticity of supply remains the same regardless of the price level, resulting in a linear supply curve.