A student asks…
Why is the elasticity of supply smaller in the short run than in the long run?
What is the elasticity of supply?
The elasticity of supply is the responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same. It is a units-free measure, and is calculated using the formula:
Suppose that when the price of a cup of coffee rises from $2 to $2.50, the quantity supplied increases from 80 cups an hour to 100 cups an hour. The increase in the quantity supplied is 20 cups an hour and the average quantity is 90 cups an hour, so the percentage change in the quantity supplied is 22 percent of the average. The price rise is $0.25 and the average price is $2.25, so the percentage change in the price is 11 percent of the average. The elasticity of supply equals (22 percent ÷ 11 percent), which is 2.
What is elastic supply? Inelastic supply?
If the elasticity of supply is greater than 1, we say the supply is elastic; and if the elasticity of supply is less than 1, we say that supply is inelastic. In our example above, the elasticity of supply of coffee is 2, so the supply of coffee is elastic.
What are the time frames of supply?
The time frames of supply:
- Momentary supply
- Short-run supply
- Long-run supply
Momentary supply is the immediate response of the quantity supplied to a price change. Momentary supply is sometimes perfectly inelastic because, on a given day, no matter what the price of a good is, producers cannot change their output.
Short-run supply is the response of the quantity supplied to a price change when some of the possible adjustments to production can be made. Most goods have an inelastic short-run supply. Firms can make some adjustments to increase output in the short run, such as working their labor force overtime, hiring and training additional workers, and buying additional equipment. But there are other adjustments producers can’t make in the short run, such as building new factories and planting forests.
Long-run supply is the response of the quantity supplied to a price change when all the technologically possible ways of adjusting production have been exploited. For most goods and services, long-run supply is elastic and perhaps perfectly elastic.
Why is the elasticity of supply smaller in the short run than in the long run?
The elasticity of supply is usually smaller in the short run than in the long run because in the long run, producers are able to exploit more adjustments to production.
In the short run, producers can make some adjustments to production, such as increasing the amount of labor. But with more time in the long run, producers can make a lot of adjustments to production. The greater the possible adjustments to production, the greater is the change in the quantity supplied and the elasticity of supply.
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