Summary
Highlights
Unitary price elastic supply occurs when the percentage change in quantity supplied is exactly equal to the percentage change in price. The steepness of the supply curve does not affect unitary elasticity, as it measures relative rather than absolute changes. For supply curves passing through the origin, any percentage price change will lead to the same percentage quantity supplied change.
Perfectly elastic supply means that quantity supplied changes significantly without any change in price. If prices increase, supply is lost. Examples include e-books, mobile applications, and foreign exchange markets. The diagram shows that when price increases, supply is lost.
Price inelastic supply means the percentage change in quantity supplied is less than the percentage change in price. This means even with large price changes, the quantity supplied changes little. Examples include old fine wines, natural gases, oil, handmade pottery, and hand-drawn artwork. The diagram shows a small change in quantity supplied (Q1 to Q2) despite a significant price drop (P1 to P2).
Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied of a product to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price. PES values indicate if supply is elastic (above one), inelastic (below one), unitary (equal to one), perfectly inelastic (zero), or perfectly elastic (infinity).
For price elastic goods, a small change in price leads to a proportionally larger change in quantity supplied. Examples include printing paper, birthday cards, and luxurious goods. The video illustrates this with a diagram showing a significant drop in quantity supplied (Q1 to Q2) due to a smaller price fall (P1 to P2).
Perfectly inelastic supply is when the quantity supplied is completely unresponsive to price changes. Examples include concert tickets for specific events (like Taylor Swift), rare artwork, and the total supply of Bitcoin (21 million limit). The diagram illustrates that quantity supplied remains unchanged regardless of price increases or decreases.
Key determinants of PES include: Time (more time allows firms to produce more, increasing PES, especially for mass-produced goods), unused capacity (high spare capacity enables quick supply increases), and storage (goods that can be stored for long periods tend to be more elastic, allowing firms to respond quickly to market changes).
Elastic supply benefits customers through quick responses to market needs (e.g., seasonal cards) and price stability by preventing demand spikes. For firms, it encourages investment in better storage, maintaining large inventories, and adopting advanced technology to quickly meet market demands and increase profits. Governments can promote elastic supply through subsidies and reduced regulations.