Elasticity of supply – Examples

The supply curve will increase from left to right when the influencing factors of supply increases .Elasticity is a quantity that shows the relative changes in the quantity supplied with respect to the price changes. Elasticity measures for example will show us how the production of wheat in   a country like Argentina responds to   changes in the market prices of wheat output. When the prices of wheat increase the land under wheat production will be expanded and hence the quantity supplied in the market will increase. This condition will only be fulfilled when the land was idle and the farmer has the inputs to produce the wheat. Therefore under this condition the elasticity of supply due to prices is very elastic. If the land is busy and cannot be utilized in the short run to take advantage of the price changes then the elasticity of supply due to price changes is said to be inelastic. A 30 percent increase in the price of wheat when there is spare production will lead to an increase of about 50% in the quantity supplied. This way we see that the elasticity of supply which is given by changes in quantity divided by changes in prices will be 2.5%. This change is greater than one implying that the elasticity of supply is elastic. In the second scenario where there is no spare production the quantity supplied will only increase by a percentage of about 10 %. Calculating the elasticity of supply will yield a 0.3% change in quantity  supplied due to price change. Since the change is less than one it means that the elasticity of supply is very inelastic.

In the wheat example above if we assume that the prices will remain this way in the long run  the farmers will have time to adjust their production through increase in acreage under wheat, increase in capital and planning for labor. In the long run the farmers are therefore able to respond to prices changes and increase their output. If the price change was 30% as we had assumed before then the changes in the quantity supplied will increase by about 60%. Calculating the elasticity of supply which is given by 80% divided by 30% yield a large positive value indicating that the elasticity of supply is very elastic.

If we also consider the same example of wheat production in Argentina and assume that labor and capital are the main factors of production in this sector, then the easiness of movement of these factors will have an impact on the elasticity of supply. We can assume that a farmer has machinery and equipment for farming but not all of them are used in wheat farming. We can also make an assumption that labor is mobile. Therefore when the production of wheat is favorable the farmer can shift all the machinery from the other areas and concentrate them on wheat production. This way the farmer increases the supply of wheat due to shift in capital. If the capital was immobile then it would not be possible for the farmer to increase production .we can therefore conclude elasticity of supply is influenced by easiness in movement of factors of production.

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marshal October 30, 2013 at 12:21 am

just nice and good


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