Economics (NCERT) Notes

4.10 Price Elasticity of Supply

Price elasticity
•The price elasticity of supply of a good measures the responsiveness of quantity supplied to changes in the price of the good.
•Price elasticity of supply (eS), is defined as
•Price elasticity of supply, (eS)= (Percentage change in quantity supplied)/(Percentage change in price)
Where ∆Q is the change in quantity of the good supplied to the market as market price changes by ∆ P .

Example
•Suppose the market for cricket balls is perfectly competitive.
•When the price of a cricket ball is Rs10, 200 cricket balls are produced in aggregate by the firms in the market.
•When the price of a cricket ball rises to Rs 30, let us assume that 1,000 cricket balls are produced in aggregate by the firms in the market.
•The percentage change in quantity supplied = 400
•Percentage change in market price = 200
•Hence, price elasticity of supply, eS =2

Types of elasticity curve
•When the supply curve is vertical, supply is completely insensitive to price and the elasticity of supply is zero.
•In other cases, when supply curve is positively sloped, with a rise in price, supply rises and hence, the elasticity of supply is positive.

Price elasticity >1
•Figure shows a straight line supply curve. S is a point on the supply curve.
•It cuts the price-axis at its positive range and as we extend the straight line, it cuts the quantity-axis at M which is at its negative range.
•The price elasticity of this supply curve at the point S is given by the ratio, Mq0/Oq0.
•For any point S on such a supply curve, we see that Mq0 > Oq0.
•The elasticity at any point on such a supply curve, therefore, will be greater than 1.

Price elasticity <1
•Here, we consider a straight line supply curve and S is a point on it.
•It cuts the quantity-axis at M which is at its positive range.
•The price elasticity of this supply curve at the point S is given by the ratio, Mq0/Oq0.
•Now, Mq0 < Oq0 and
•Hence eS < 1.

Price elasticity =1
•Here the supply curve goes through the origin.
•The price elasticity of this supply curve at the point S is given by the ratio, Oq0/Oq0 which is equal to 1.
•At any point on a straight line, supply curve going through the origin price elasticity will be one.

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