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Elasticity of Supply: Formula, Importance And Factors

The law of supply does not explain the exact changes in the quantity supplied of a commodity due to a chance in price. Change in supply is not same in the case of all commodities. It may be less in the case of some commodities and more in the case of other commodities. In this connection, the concept of elasticity of supply is useful for estimating the exact proportionate change in the quantity supplied due to a proportionate change in the price of a commodity.

Elasticity of supply Formula:

This concept explains the numerical relationship between the price and sum of a commodity. It is measured by the following formula:

ES= Proportionate change in supply/Proportionate change in the price of a commodity. Where ES is Elasticity of Supply.

When the co-efficient is equal one, it is said to be unit elasticity of supply. If it is less than one, the elasticity of supply is said to be inelastic. On the other hand, when the coefficient is greater than one, the elasticity of supply is known as elastic.

Kinds of Elasticity of Supply:

There are five kinds of elasticity of supply. They are explained as below:

1. Perfectly elastic supply: When a small change in price brings an infinite change in the supply of a commodity, the elasticity of supply is said to be infinite. Here the supply curve will he parallel to OX axis.

2. Perfectly inelastic supply: Elasticity of supply is said to be perfectly elastic when supply remains constant irrespective of changes in price.  Whatever may be the change in price, there will not be any change in supply. Supply curve of this situation will be parallel to the OY axis. Here, elasticity of supply is zero.

3. Relatively Elastic supply: If a small change in price leads to a great change in supply, it is a case of relatively elastic supply. Here elasticity of supply of this type is more than one.

4. Relatively inelastic supply : If a great change i n price causes a small change in supply, it is called relatively inelastic supply. Here elasticity of supply, will be less than one.

5. Unitary elastic supply: When the proportionate change in the price is equal to the proportionate change in the supply, it is a case of unitary elasticity of supply. Here elasticity of supply will be equal to one.

Measurement of elasticity of supply:

Elasticity of supply can be measured by following the geographical method. This is shown in the following diagram:

In the diagram, quantity offered for sale or supplied is represented along OX axis. Price is represented along, OY axis. SS is the supply curve. AB is the tangential line drawn in equal distance between OX and OY axes. It represents the unitary elasticity of supply. It touches the supply curve at the lowest point. If this tangential line intersects OY axis, elasticity of supply will be more than one. If it intersects OX axis, elasticity of supply will be less than one.

Factors determining elasticity of supply:

Elasticity of supply is determined by the following factors:

1. Availability of suitable factors of production to increase the output.

2. Availability and extent of markets.

3. Nature of techniques of production.

4. Entry of new firms.

5. The behavior of costs.

6. Time element.

Importance of elasticity of supply :

The concept of elasticity of supply has great significance. It is useful for understanding the concept of value and knowing the distribution aspects of tax burden.

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