Evaluating Price Elasticity of Supply: Sensitivity of Supply to Price Changes

Price Elasticity of Supply refers to the responsiveness of the quantity supplied of a good or service to changes in its price. It measures the degree to which the quantity supplied responds to changes in price, indicating how sensitive producers are to price changes in the market.

• The price elasticity of supply of goods: It measures the responsiveness of the quantity supplied to changes in the price of the goods. More specifically, the price elasticity of supply, denoted by eS, is defined as shown in the image.

• Vertical Supply Curve: When the supply curve is vertical, supply is completely insensitive to price and the elasticity of supply is zero.
• Positively Sloped Supply Curve: When the supply curve is positively sloped, with a rise in price, supply rises, and hence, the elasticity of supply is positive. 
• Independent of Units: Like the price elasticity of demand, the price elasticity of supply is also independent of units.

Analyzing Supply Elasticity: Geometric Method on Straight-Line Curves

• It is used to analyse the price elasticity of supply on a straight-line supply curve.
• Figure  is referenced to explain the concept through three different panels (a), (b), and (c), each showing different scenarios of a supply curve and the corresponding Price Elasticity of Supply at point S on the curve.

Straight-Line Supply Elasticity: Analyzing Ratios in Panel (a)

• The supply curve is a straight line intersecting the price axis in its positive range and extending to cut the quantity axis at point M in its negative range.
• Point S on the supply curve is analysed for Price Elasticity of Supply, calculated as the ratio​​​​Mq0Oq0​.
• The scenario demonstrates that Mq0​>Oq0​, resulting in a Price Elasticity of Supply greater than 1 at any point on this supply curve.

Origin-Aligned Elasticity: Insights from Panel (b) Analysis

• In this panel, the supply curve is a straight line passing through the origin, implying point M coincides with the origin, making Mq0​=Oq0​.
• The price elasticity at point S is calculated as ​​​​​Oq0Oq0=1.
• This denotes that at any point on a straight-line supply curve passing through the origin, the price elasticity will be one.

Quantity-Driven Elasticity: Insights from Panel (c) Analysis

• A straight-line supply curve is considered, with point S it, intersecting the quantity axis at point M in its positive range.
• The price elasticity at point S is again given by the ratio ​​Mq0Oq0 ​​, but now Mq0​q0​, leading to a price elasticity eS​<1.
• This holds true for any point S on this supply curve, indicating a Price Elasticity of Supply of less than 1 at all points.

Conclusion

• The chapter discusses a firm’s profit-maximizing behaviour and supply curve derivation in the short and long run, emphasizing the importance of market price covering Average Variable Cost (AVC) in the short run and Average Cost (AC) in the long run.
• Factors like technological progress and input prices were identified as key determinants affecting the Marginal Cost (MC) curve and, consequently, the supply curve.
• The market supply curve was discussed as an aggregation of individual firm supply curves, shifting with changes in the number of firms in the market. 
• Concepts of opportunity cost, normal and super-normal profits, break-even points, and shutdown points were also elucidated, providing insights into firm and market operational dynamics.

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