(a) Define elasticity of supply (b) When is supply described as (i) elastic (ii) inelastic (c) Outline any two factors that influence elasticity of supply.
Question 1 Report
(a) Define elasticity of supply
(b) When is supply described as (i) elastic (ii) inelastic
(c) Outline any two factors that influence elasticity of supply.
Answer Details
(a) Elasticity of supply. Elasticity of supply measures the degree of responsiveness of the quantity supplied of a good to a change in its price. It is calculated as:
\[ E_s = \frac{\text{percentage change in quantity supplied}}{\text{percentage change in price}} \]
(b) When supply is:
- (i) Elastic. Supply is elastic when a small change in price causes a more than proportionate change in quantity supplied, so \( E_s > 1 \).
- (ii) Inelastic. Supply is inelastic when a change in price causes a less than proportionate change in quantity supplied, so \( E_s < 1 \).
(c) Two factors that influence elasticity of supply.
- Time period. The longer the time available, the more producers can adjust output to a price change, so supply is more elastic in the long run than in the short run.
- Nature of the good and ease of storage. Durable goods that can be stored have a more elastic supply, whereas perishable goods (which cannot be held back) have an inelastic supply. (Other valid factors: availability of spare productive capacity, cost and ease of changing output, and mobility of factors of production.)
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