Elastic supply, Managerial Economics

Elastic Supply

Supply is said to be price elastic if changes in price bring about changes in quantity supplied in greater proportion.  Thus, when price increases, quantity supplied increases in greater proportion.  The supply curve is not steeply sloped and the elasticity of supply is greater than one.

When price rises from P1 to P2, quantity supplied rises in greater proportion from q1 to q2.  This is the case when there are a lot of stocks of the commodity or the commodity can be produced within fairly short period of time so that when price rises, quantity supplied can be increased substantially.

Conversely, if price falls from P2 to P1, quantity supplied falls in greater proportion from q2 to q1.  This is the case of a commodity which is easily stockable e.g. manufactured articles.  When price falls, quantity supplied can be substantially reduced.  The commodity is then stored instead of being sold at a loss or for very reduced profit.

Posted Date: 11/27/2012 6:51:35 AM | Location : United States

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