Elasticity of Supply

$Elasticity of supply:$ measures how responsive the quantity supplied is to a change in price * supply of a good will increase when its price rises * supply of a good will decrease when its price decreases * this is important because it’s necessary for a firm to know how quickly and effectively it can respond to changing market conditions (especially price changes)

Fundamental determinant is how quickly per-unit costs increase with an increase in production * If increased production requires much higher per-unit costs, then supply will be inelastic * Ex: it’s usually difficult to increase the supply of raw materials like oil and coal without increasing costs, so the supply of raw materials is usually inelastic * Supply of manufactured goods is usually more elastic since production can often be increased at similar costs per unit by building more factories
Supply tends to be more elastic in the long run than in the short run because suppliers have more time to adjust
If |Ed|<1 (demand is inelastic), revenues will move in the same direction as the price change
If |Ed|>1 (demand is elastic), revenues will move in the opposite direction as the price change
If |Ed|=1 (demand is unitary elastic), revenues will be unaffected by a price change