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SS2: ECONOMICS - 2ND TERM

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Definition of Elasticity of Supply

Elasticity of supply is the degree of responsiveness of supply to little changes in price, cost of production and prices of other commodities.

Types Elasticity of Supply

a)  Price Elasticity of Supply

b) Cost Elasticity of Supply

c) Cross Elasticity of Supply

Price Elasticity of Supply

This is the degree to which supply reacts to a little change in price it can be calculated as

ES =  \( \frac{\% \Delta \; in \; Qs}{\% \Delta \; in \; P} \)

Where

∆Qs = Change in Quantity Supplied

∆P = Change in Price

∆Qs = \( \frac{Qs1 \; – \; Qs2}{Qs} \)

P = \( \scriptsize \Delta \normalsize \frac{P2 \; – \; P1}{P1} \)

OR

ES = \( \frac {Qs} {P} \; \times \; \frac{P}{Qs} \)

Types of Price Elasticity of Supply

1. Elastic Supply

This is the type of price elasticity of supply in which the change in quantity supplied is greater than the change in price. A small change in price leads to a greater change in the quantity of goods supplied. The percentage in quantity supplied is more than the percentage change in price. It is the relative elastic supply= 1<ep<or ep>1

From the graph the change in quantity supplied which is given as qoq1 is greater than the change in price PoP1

Screen Shot 2020 12 31 at 5.25.32 PM

2. Inelastic Supply

This is the case where by the percentage change in quantity supplied is less than the percentage change in price. A large change in price brings about a smaller change in quantity supplied. E.g. 5% fall in price leads to 1% reduction 

Inelastic Supply

3. Unitary Elasticity of Supply

This occurs when the change in quantity supplied is equal to the change in price e.g. 5% increase in price leads to 5% increase supply 

Screen Shot 2020 12 31 at 6.15.26 PM

From the diagram change in quantity supplied qoq1 is equal to the change in price PoP1.

4. Perfectly Elastic Supply

This is an infinite supply situation. At a fixed price, an undetermined quantity is supplied. So the change in supply is infinity. ep= infinity

Perfectly Elastic Supply

5. Perfectly Inelastic Supply

When the quantity supplied remains constant irrespective of changes in price. This is a zero elasticity case at different prices the same quantity of the commodity is supplied i.e. supply remains fixed or unchanged. 

 Perfectly Inelastic Supply SS2 Economics

Note: The Coefficient of Price elasticity of supply

If Ed = 0 → perfectly inelastic Supply

If Ed = ∞ → perfectly elastic supply

If Ed >1 → Fairly elastic supply

If Ed <0 → Fairly inelastic supply

If Ed =1 → Unitary elastic supply

Cost Elasticity of Supply

This is the responsiveness of supply to a little change in the cost of production. If the cost of production increases supply will fall, but if the cost of production falls supply will increase. 

It is measured as

\( \frac{\% \Delta Qs}{\% \Delta \; Cost} \)

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