Price Elasticity Of Supply

Published: 2021-04-20
Views: 301
Author: Contributor
Published in: Economics

Many factors like cost of production, price, policy decisions, and technology, have an impact on a product's supply.

It is regulated by the provisions of supply, that further states that there is a strong correlation between a product's supply and price, while all other factors remain constant.

What exactly is Supply?

Supply is an economic theory defined as the amount of a product that a seller is prepared to offer in the market at a specific price and within a certain time frame.

The Law of Supply 

The price of a product and the quantity offered for sale over a given period of time have a direct relationship.

Whenever the price of a good rises while all other factors remain constant, the quantity available for sale increases; when the price falls, the quantity available to purchase decreases.

The law of supply describes the relationship between both price and the quantities that suppliers are willing to sell.

Supply Flexibility

The supply elasticity of a commodity tries to establish a quantitative correlation between its supply and its price.

As a result, we can use the concept of elasticity to express the numerical change in supply with respect to the change in the commodity's price.

It's worth noting that elasticity can also be computed in relation to other supply determinants.

However, the price of a product is the most important factor in determining its supply.  We commonly refer to supply price elasticity.

The ratio of the percentage change in price to the percentage change in quantity supplied of a commodity is known as price elasticity of supply.

Types of Supply

The following are types of supply

Market Demand

The overall quantity of a product or service in which all production companies are ready to give at the current set of relative prices over a set period of time is referred to as the market supply.

Only if it refers to a single producer, "Supply" is understood to mean Market Supply.

Short-term Supply

The firm's goal in evaluating how much output to supply is to maximize profits while keeping two constraints in mind: the demand for the firm's product from consumers and the firm's production costs.

The price at which a perfectly competitive market can sell its output is determined by consumer demand. The firm's production costs are determined by the technology it employs.

The profit margin is the difference between the company's total revenues and total costs.

Short-term Curve of Supply

The term "short-run" refers to a period of time during which the dimensions of the plant and equipment are fixed, and rising prices for the commodity can only be met by making intensive use of the existing plant, i.e., increasing the number of variable factors.

A firm manufactures a product at which marginal cost equals price.  If the price is greater than the marginal cost, the firm will benefit from increasing output to match the price.

If the price is below the marginal cost, on the other hand, it is losing money and will reduce output until the marginal cost and price are equal.

As a result, in the short run, the firm's marginal cost curve is the supply curve of the perfectly competitive firm.

Long-term Supply

Firms can fluctuate all of their inputs in the long run. In the long run, the capacity to vary the number of input factors allows for the possibility of new firms entering the market and existing firms exiting.

Remember that there are no barriers to firms entering and exiting a perfectly competitive market.

If some established firms in the market are making positive economic profits, new firms will be enticed to enter the market.

Existing businesses, on the other hand, may decide to sell off assets if they are losing money.

As a result of these factors, the number of businesses in a perfectly competitive market is unlikely to stay constant over time.

Meaning of Joint Supply

A quantity of products has a popular supplier in that they too are manufactured together.

Wheat and straw, wool and mutton, cotton and cottonseed, and so on are all produced as a result of the production of one.

Joint cost products are another name for joint products. There are two types of joint products: those with fixed proportions and those with variable proportions.

Wheat and straw, as well as cotton and cottonseed, fall into the first category.

If the wheat or cotton crop is particularly good, the supply of cottonseed or cotton is automatically increased.

However, separating the costs of manufacturing such products is difficult.

The price of each product, on the other hand, can be set based on the principle of "what the traffic will bear," or what the product will sell for in the market.

To put it another way, the price of each item will be determined by its marginal utility to customers.

However, each product's price must be such that the total revenue from its sale equals the total cost of production.

Supply Determinants

There are four major supply determinants, as listed below:

• Subsidy/tax A producer's goal is to maximize profit, but a tax increase will only raise his expenses, reducing his ability to purchase resource supplies and trying to force him to decrease his supply.
• The cost of other manufactured goods. A producer can make a variety of products in addition to the one they're working on.

A manufacturer's money is limited, so if he expands his supply of one product, he must reduce his supply of the other, unless his sales increase.

• Technological advancements. Technology aids a producer in lowering his production costs.
• The availability of resources. Other resources, for example, raw materials and labor, must also be paid for by the producer. If he doesn't have enough money to supply a certain number of products leading to an increase in resource supplies, he'll have to cut back.