Elasticity of supply measures how responsive producers are to changing prices of a product. It is calculated by looking at the percentage change in quantity supplied that results from a percentage change in price.
When the elasticity of supply is elastic, a small change in price results in a large change in quantity supplied. If a product has an inelastic supply, a large change in price results in a small change in quantity supplied.
The degree of elasticity of supply can provide insight into what producers are willing to produce and at what price. For example, if a supply is elastic, then producers are willing to produce more at lower prices than they are at higher prices, while inelastic supplies indicate producers are more likely to stick to their prices regardless of the change in demand.
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What is the difference between elasticity of demand and elasticity of supply?
Elasticity of demand measures how sensitive the demand for a good or service is to changes in its price. If a good or service is price elastic, a small change in price will cause a significant change in the quantity demanded.
If a good or service is price inelastic, a small change in price will have little effect on the quantity demanded. On the other hand, elasticity of supply measures the degree to which the quantity supplied of a good or service changes in response to a change in its price.
If a good or service is price elastic, a small change in price will result in a large change in the quantity supplied. If a good or service is price inelastic, a small change in price will have little effect on the quantity supplied.
In both cases, the higher the elasticity, the more responsive the demand or supply is to changes in price.
What happens if elasticity is greater than 1?
If the elasticity of a product is greater than 1, it means that the percentage change in quantity of the product is greater than the percentage change in price. This is known as price elasticity of demand, and it implies that the demand for the product is price sensitive.
The demand for the product is very sensitive, and so a small change in price will result in a large change in the quantity demanded. This suggests that a small increase in the price of the product will decrease the quantity demanded significantly, while a small decrease in the price of the product will cause a large increase in the quantity demanded.
In other words, purchasers are very sensitive to price changes for products with elasticity greater than 1, and will likely switch to a lower priced product if a significant increase in price occurs.
This hurts sales and profits for the producer since fewer units are sold at a higher price.
Does high supply mean high demand?
No, high supply does not necessarily mean high demand. When supply is high and demand is low, the prices of goods and services will be lower, as there are more goods and services and fewer people to buy them.
In economics, this is known as “excess supply. ” On the other hand, when demand is high but supply is low, the prices are higher, as there is a shortage of goods and services and more people wanting them.
This is known as “excess demand. ” Therefore, the relationship between supply and demand is an important factor in determining prices in free market economies.
What happens when the supply is too high?
When the supply is too high, it typically results in a decrease in prices. This is due to the abundance of products being supplied to the market, meaning that companies have to compete for customers by offering lower prices than their competitors.
This pressure can also put a strain on businesses, as they may no longer be able to make profits since the prices of their goods and services are so low. Additionally, a high supply can also lead to a decrease in demand as people tend to purchase less because they are spoiled with choices and may find better deals elsewhere.
Ultimately, a high supply can create an imbalance in the market, leading to market instability, which can be harmful for both consumers and businesses.
