Sometimes, we need to know whether a change in price will cause a change in quantity supplied, and if so, to what extent will the quantity of supply changes.
The device, which measures price sensitivity of supply of a product, is called elasticity of supply. Elasticity of supply (Es) is calculated by using the formula:
Usually, for normal goods, the value of Qs is always positive. If for a particular product, change in price causes more than proportionate change in its quantity supplied, then that supply curve of that product is called price elastic supply curve. Figure 5.18 shows a price elastic supply curve, where price has changed from P1 to P2 leading to a change in more than proportionate increase in quantity supplied, from Q1 to Q2.
On the other hand, if a change in price causes a less than proportionate change in quantity of a product supplied, then supply curve of that product is called price inelastic supply curve. In figure 5.19 we observe that an increase in price from to P2 results in a less than proportionate increase in quantity supplied, i.e. from Q1 to Q2.
When supply is perfectly price inelastic, change in price does not cause any change in quantity supplied. A perfectly price inelastic supply curve is a vertical straight line (figure 5.20).
When the supply curve is a horizontal straight line parallel to the x – axis, it is termed as perfectly elastic supply curve (figure 5.21) because at a particular price (say, PJ, any amount can be supplied. But if a slightly lower price (say, P2) is offered, the producers will not supply Figure 5.21 even a single piece.
Change in quantity of supply, as a result of change in price of the product, depends on time period. Time period is classified into three categories:
(1) Immediate short-run (also known as market period)
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(2) Short-run; and
(3) Long-run
Let us discuss these three categories one by one.
(1) Immediate Short-Run:
Immediate short-run refers to a period just immediate after the price change. In immediate short-run, it is not possible to change the quantity of inputs. Actually, this time period is too short for suppliers to respond to price change and adjust their respective quantities of supply by changing quantities of different inputs. This is applicable for cases like agriculture when the decision has already been taken and implemented. For example, total yield of paddy from a piece of land is 100 kgs.
Suppose, price of paddy suddenly falls just before harvesting. In this situation, the owner of that land will not get any scope to reduce quantity of agricultural output of paddy as a spontaneous response to decline in price of it.
Since he is about to harvest, irrespective of revised price of paddy, he will have no option but to supply 100 kgs and not less than that. It will take another season for him to adjust quantity of paddy to be supplied in the market.
Since during the current period, there will be no change in quantity of supply, even as a result of fall in price, the corresponding supply curves (implying inelastic supply curve) for the farmer will be a vertical straight line.
(2) Short-Run:
Short-run refers to a time period within which it is not possible to change plant size, but the other inputs can be changed. Referring to the example of farming, the farmer will be unable to change farm size, but in the short-run, he can adjust other inputs like labour, fertilisers etc. as response to change in price of paddy.
As a result, with decline in price of paddy, its yield will also decrease. This is shown by S1S1supply curve, which is upward sloping but steep indicating that change in price results in limited change in quantity of supply.
(3) Long Run:
Long run refers to a time period within which, in response to change in price of the final input, it is possible for firms to change quantities of all the inputs required to be employed to produce that product. Since in the long run, suppliers are free to adjust all inputs as well as plant size, change in price of the final output is more pronounced from Q to Q1) than the other two cases narrated above.
As a result of this change in price, significant change in quantity of supply is observed. Naturally, in the long run elasticity of supply is flatter than that of the case of short run. Referring to the example of farming, the farmer will be able to change farm size and quantity-modifications in other inputs like labour, fertilisers etc.
As response to change in price of paddy. Consequently, as price of paddy falls, its supply will also decrease. This is shown by S2S2 supply curve, which is upward sloping and flat indicating that change in price results in significant change in quantity of supply.
