Monday, October 22, 2007

A few short notes on elasticity of supply


Readers question: Also can you please explain the difference between elastic,inelastic and fixed supply

Elastic supply means that an increase in price causes a bigger % increase in supply. It has a PES of greater than 1.

elastic

Supply will be elastic if it is easy for a firm to increase supply e.g. spare capacity, easy to employ more factors of production

Inelastic supply. This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1

elastic

Supply is often inelastic in the short term, when it is difficult for firms to increase their capacity.

Fixed supply means that supply is not dependent on the price level. Whatever the price, the supply will remain the same. Supply is perfectly inelastic.

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