Supply Curve and Five Elasticities

A supply curve is a graphical representation of the supply schedule of a product. Every point on the curve shows a combination of price and supply of the product. However, different styles of the curve in the graph explain the price-supply relationship in different colors.

The supply curve styles help us understand sensitivity (elasticity) of the product supply to the ratio of change in the price. The elasticity of a product can be measured by this formula:

Supply Curve

Some products respond very quickly to small changes in the price while others take a long time. Some react with massive impact while others would need a more significant difference in price to affect the supply chain. These factors help us to understand whether we should enter some business or not. If the impact on supply shall be a long run, it may not be easy to open. However, in case of short-run elasticity, we may have to decide how much supply we should increase or decrease to maximize the profits. Furthermore, in long run elasticity, we need to raise capital (land, equipment, technology, etc.) while in short run added labor shall bear the fruit.

Supply Curve for Public Managers

supply curves

In public policy, the concept of elasticity of supply can help us a lot. We can measure how we can increase, decrease or even eliminate the supply of a product by making changes in its price. For example, the tobacco is dangerous for health.

Smoking also creates a negative externality for the closer ones. Heavy fines on public smoking can reduce the impact of the externality. Still, the smoker still needs health products to cure his health. The best public policy would increase the price of smoking that not only reduces smoking but also generates revenue for the health of the active and passive smokers. You can find a $1.00 cigarette at Singapore airport, but you will have to pay $7.00 to $10.00 more inside Singapore. It generates enormous taxes to treat not only the active smokers but also the passive ones. It also goes to universities and hospitals.

The curve style can help us in such critical situations. Five classes of elasticity of supply curve can be understood with this table.

 

Supply Curve

Name

Value of elasticity

∆ in Price vs. ∆ in Quantity Supplied

S1

Horizontal

Perfectly elastic

E=∞

An infinite small decrease in price causes infinite large change in supply.

S2

Flat but not Horizontal

Relatively Elastic

E>1

Relatively small change in price causes large change in supply.

S3

Straight Line

Unit Elastic

E=1

Any change in price causes equal relative change in supply.

S4

Steep but Not Vertical

Relatively Inelastic

E<1

A large change in price is required for a small change in supply.

S5

Vertical

Perfectly inelastic

E=0

Change in price does not cause any change in supply.

A Simple Video to Understand the Concept

It is not a difficult concept. But the easiest way to keep in mind for a long time is a video. I have found this video very helpful for elasticity or in-elasticity of a supply product.

Origin of Supply and Demand Model

Supply and Demand Lesson

Perfect Price Elasticity of Supply

Relative Elasticities and Inelasticity of Supply

Exceptions to Demand and Supply