Understanding price elasticity from a supplier’s perspective
The elasticity of supply measures how responsive the quantity of a product supplied is to changes in price.
If the number of product a supplier is willing to fulfil changes a lot when there is a change in price, the product is elastic. On the other hand, when the quantity supplied doesn’t vary so much with price changes, then it is inelastic.
What determines the quantity of product a supplier is willing to fulfil?
Cost! If an increase in the supply of a product requires a significant increase in the cost of production then there is no incentive to scale production.
If scaling the production increases unit cost, then the supply for that product is inelastic. On the other hand, if it doesn’t, then supply is elastic.
Let's compare two products; Picasso painting 🖼 and toothpick.
Which of these two products is easier to scale production without driving the cost up? Clearly toothpick. It is easier to increase the production of toothpick without increasing the unit cost of production, hence the supply of toothpick is elastic.
On the other hand, it’s impossible to increase the production of Picasso paintings because there aren’t any more paintings produced, hence the supply of Picasso paintings is very inelastic.
Immediately after an increase in price, producers are incentivized to increase production. This doesn’t happen immediately because producers can only scale production when there’s a production capacity in place to accomodate the production of more goods..
In the short run, the elasticity of supply tends to be more inelastic because it’s harder to expand output at the same cost, but over time when producers expand production capacity, the supply curve becomes more elastic. The more time producers get to respond to price, the more elastic the product.
Demand for inputs or raw-materials
When there is a high demand for the inputs required for production, then the supply is said to be inelastic.
It is easy to double the quantity of toothpick produced without a high demand for wood since toothpick production demands less wood. The price of wood is not going to be increased when we double toothpick production, hence supply of toothpick is elastic.
If the industry is a big demander in its input market, then the supply of that product is inelastic. Automobiles require lots of steel, increasing the production of automobiles will lead to an increased demand for steel, which increases the cost of producing automobiles, hence the supply of automobiles is inelastic.
Geographic scope of the market is another determinant of elasticity of supply. The narrower the scope of the market, the more elastic the supply, the wider the scope of the market, the less elastic.
Let’s say there’s an increased demand for oil in Lagos as a result of increasing population, this increased demand can easily be fulfiled by neighbouring suppliers without pushing up the oil prices. The cost of meeting this increased demand is not as significant when compared to an increased global demand for oil.
In summary, the supply of a product is more elastic when an increase in the supply of a product requires a significant increase in the cost of production.
