Elastic offer

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Supply is elastic is a situation where a change in price, regardless of its proportion, corresponds to a large variation in the quantity supplied.

This type of elasticity occurs when the variation in the quantity supplied varies in a greater range than that in the price of the good. As the graph below shows, the supply curve tends to be more horizontal than vertical. This is due to the fact that the range of growth of the quantity supplied is greater than that of the price. Therefore, its slope is less than 45 degrees.

Elastic supply formula

In mathematical terms, this type of elasticity in supply means that the supply is greater than one. That is, the percentage change in the quantity supplied will be greater than the percentage change in the price:

The previous expression, quite clearly, is telling us that the variation of the percentage of the quantity supplied, with respect to the variation of the percentage of the price, is greater than the unit. Therefore, in the calculation of elasticity of supply, if the coefficient of elasticity yields a value greater than one, it is called elastic supply.

It is worth asking ourselves now, why this sensitivity of supply to price? The key reason for such supply behavior is that the company has the ability to rapidly transform production factors in the short term. This may also be related to the cost of producing more goods, in the sense that the unit cost falls when the volume produced increases. This favorable situation will allow the company to increase, at any time, the amount of goods to be offered in the event of an increase in price.

In sum, what influences a supply to be elastic will be, in the first place, the flexibility that the company possesses to vary its productive capacity. Second, it will be the cost of producing more units of the good.

Products or goods with elastic supply:

  • Furniture offer.
  • Vehicle offer.
  • Offer of books.

Example related to the calculation of the elastic supply

In order to know the process of calculating the elasticity of an elastic supply, we are going to suppose a possible situation in the book market, given that the edition of a certain author continues to have a strong demand. Suppose the price of the book increases from 40 to 45 euros. Meanwhile, the quantity supplied goes from 1000 to 1600 units.

Let us then proceed to determine in this case what is the coefficient of elasticity. For this we are going to use the following formula:

Step 1: This step is to determine the top of the formula. That is, the percentage change in the quantities.

We calculate the absolute change in quantities, which is obtained by subtracting less from the initial quantity from the final quantity. This is: 1600 - 1000 = 600.

We now divide this value by the initial offer. Thus we have the following: 600/1000 = -0.6, which, taken as a percentage value, is equal to: 0.6 x 100 = 60%.

This -60% then represents the percentage change in the quantities offered. That is, we have determined the upper part of the formula.

Step number 2: This step is to determine the bottom of the formula. That is, the percentage change in the price.

We first determine the absolute price change, which is obtained by subtracting the initial price minus the final price, that is 40 - 45 = -5. We now divide this value by the initial price. Thus we have the following: 5/40 = 0.125, which, taken as a percentage value, is equal to: 0.125 x 100 = 12.5%.

This 12.5% ​​then represents the percentage variation in the price. That is, we have determined the lower part of the formula.

Step number 3: In this final step we proceed to replace the values ​​determined in steps one and two.

We conclude that the supply for this product is elastic, since its coefficient of elasticity is greater than one.A change in the price has caused a greater change in the quantities offered, since the variation in the quantities offered was 60% while the variation in the price was 12.5%. That is, a 1% change in price causes a 3% change in supply.

Elastic demand Price elasticity of supply Elasticity of supply Perfectly elastic demand

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