One of the key economic indicators that can characterize the level of development of any market for goods or services is the elasticity of supply.
These indicators help to understand the dependence of supply and demand on the price of a product or service. This article will focus specifically on the elasticity of supply, the facts that affect it, and the characteristics of markets with different levels of this indicator.
We will understand the concept
When describing any economic indicator, it is necessary first of all to fully disclose its concept.
Supply elasticity is an indicator that shows how dependent or free the supply level is on the price of a product in a particular market.
That is, if this indicator is derived by calculation, then you can understand how many products manufacturers or traders are willing to sell when setting a specific price.
In this regard, many market analysts use the elasticity of supply to evaluate a particular sector of the economy or forecast the sales volumes of specific goods.
It is also actively used by the ministries of finance of various countries to forecast the level of economic development, GDP, etc.
What affects this indicator?
The following factors may influence the elasticity of a supply at a price:
- Technological capabilities of the enterprise.
- Defined terms for the sale of a particular product.
- Market development.
The manufacturer’s technological capabilities determine how quickly he can adapt to changes in market conditions. The sooner the company can change its production process, the higher will be the elasticity of supply at a price.
The first paragraph also refers to how quickly the company can increase or decrease the volume of production to maintain a favorable price in the market.
The second paragraph implies the expiration date and the necessary periods for the sale of goods. For example, take the dairy products market. Most products deteriorate within a month after production.
Developed markets have a greater level of competition, as well as less regulation by the state. It is also displayed on their elasticity.
The factors of elasticity of supply listed above can significantly affect both an individual producer and entire sectors of the economy, therefore, when analyzing elasticity, they should be considered from the objective side.
Calculation formula
In order to determine the type of elasticity, it is necessary to calculate it. This can be done using the following formula: E = (P2 - P1) x (C2 + C1) / (P2 + P1) x (P2 - P1), where:
- E - price elasticity of supply;
- P1, P2 - the initial and current supply volumes, respectively;
- C1, C2 - the base and current price of products, respectively.
So, at the time of the calculations, you need to understand what the results may be and how to properly characterize them.
Types of offer elasticity
Depending on how prices depend on the supply of goods on the market, the following types of offers are distinguished:
- Inelastic.
- Elastic.
- With the presence of a single elasticity.
- Absolutely elastic.
- Absolutely inelastic.
Next, consider each type.
Inelastic offers
Such a proposal is characterized by slight fluctuations in the volume of products offered on the market with changes in prices. Coefficient of elasticity offers in this case will not be more than one.
In such a situation on the market, manufacturers for some reason cannot sharply increase or decrease the volume of output despite the fact that the price of it will fluctuate both in the direction of growth and decrease.
Elastic offers
If the coefficient is greater than one, then any change in the price of a product can bring significant changes in the volume of production.
This often happens in areas in which the cost of production of goods is high enough, and the profitability of the product is close to breakeven point.
With single elasticity
This situation happens when the price changes in direct proportion to the offer. That is, an increase in the price of goods by 5%, manufacturers increase the volume of production at the same level.
The coefficient in this case is equal to one.
Completely elastic
In this case, the following happens - with a decrease in the price of products, manufacturers stop producing it. Such a rule is valid and vice versa: an increase in price entails an infinite increase in supply.
Accordingly, the coefficient will tend to infinity.
Totally inelastic
The factors of elasticity of supply can lead to the fact that the market will become inelastic. This means that no matter how the price of a product changes, the offer will always be at the highest level.
These can be both social products and government-regulated spheres of the economy. It can also be alcohol and tobacco products, the offer of which has always been and remains at a high level. In this case, the coefficient is zero.
No accurate conclusions can be drawn.
Of course, the state of the market, supply and demand cannot be judged only on the basis of elasticity. It is necessary to conduct a deep economic analysis in order to find out and explain the impact on the situation of all primary sources.
But the elasticity of supply helps to better understand the dependence of the quantity of output on the volume of its production.
