While many students commonly associate steeper supply curves with inelastic price elasticity of supply (PES) and flatter supply curves with elastic PES, it's important to note that the degree of steepness or flatness alone doesn't determine elasticity. Additionally, the misconception that a 45-degree supply curve indicates unitary elasticity needs clarification, as the angle of 45 degrees doesn't necessarily indicate unitary elasticity.
PES = 1 (Unitary elastic)
Actually, the supply curve doesn't have to be at 45 degree. Any linear supply curve that passes through the origin has a PES = 1 because:
This confirms that for a linear supply curve passing through the origin, the price elasticity of supply (PES) is always equal to 1. This indicates unitary elasticity, meaning that the percentage change in quantity supplied is equal to the percentage change in price.
PES > 1 (Elastic supply)
When a supply curve passes through the price-axis (vertical axis), it implies that even a small change in price results in a significant change in quantity supplied. This suggests that producers are highly responsive to changes in price, indicating elastic supply. In other words, producers are willing and able to adjust their output quickly in response to changes in market conditions, resulting in a relatively elastic supply curve.
In a market economy, prices serve as signals for producers and consumers. A positive price, even when quantity supplied is zero, indicates that there is some level of demand for the good or service at that price point. This suggests that consumers are willing to pay a certain price for the product, even if it's not currently available in the market.
PES < 1 (Inelastic supply)
Conversely, when a supply curve passes through the quantity-axis (horizontal axis), it indicates that changes in price have little to no effect on the quantity supplied. This suggests that producers are not very responsive to changes in price, indicating inelastic supply. In this case, even large changes in price result in only small changes in quantity supplied, indicating a relatively inelastic supply curve.
At a price of zero there's still a positive quantity supplied. This is because when the price is
zero, it's typically a situation where there's excess demand or a shortage in the market. Despite the lack of a price signal, producers may still be supplying some quantity simply because they're fulfilling existing contracts, trying to maintain market share, or for other strategic reasons. However, their ability to increase output significantly in response to a zero price may be limited by factors like production costs or capacity constraints.
Changes in PES along the supply curve
Elastic supply
Along the supply curve, as price and quantity supplied increase, the elasticity of supply decreases.
In practical terms, this suggests that initially, as price increases, producers can easily increase their output, but as production nears full capacity or other constraints come into play, the ability to further increase output in response to price changes diminishes. This results in a diminishing elasticity of supply along the curve.
Inelastic supply
Along the supply curve, as price and quantity supplied increase, the elasticity of supply increases.
This indicates that producers are initially operating close to their maximum capacity or facing significant constraints. As price increases, they may be able to gradually increase output, but the responsiveness of supply improves as they are better able to overcome constraints or invest in expanding production capacity.
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