Inelastic supply
| Inelastic supply |
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Inelastic supply is a situation where the quantity supplied is not very sensitive to changes in price. This means that when the price of a good rises, the quantity supplied does not significantly increase, and when the price falls, the quantity supplied does not significantly decrease. In this situation, the demand curve and the supply curve are parallel to each other and the supply curve is relatively steep. Examples of goods with inelastic supply include basic staples such as food, fuel, and energy.
In contrast to inelastic supply, elastic supply is a situation where the quantity supplied is very sensitive to changes in price. When the price of a good rises, the quantity supplied increases significantly and when the price falls, the quantity supplied decreases significantly. In this situation, the demand curve and the supply curve are not parallel to each other and the supply curve is relatively flat. Examples of goods with elastic supply include luxury items such as jewelry, cars, and clothing.
Example of Inelastic supply
- Food: People need to eat food and therefore, the quantity supplied of food does not significantly change when the price changes.
- Fuel: People need to use fuel to travel and therefore, the quantity supplied of fuel does not significantly change when the price changes.
- Energy: People need to use energy to power their home and therefore, the quantity supplied of energy does not significantly change when the price changes.
Example of Elastic supply
- Jewelry: People do not need to buy jewelry and therefore, the quantity supplied of jewelry increases significantly when the price decreases.
- Cars: People do not need to buy cars and therefore, the quantity supplied of cars increases significantly when the price decreases.
- Clothing: People do not need to buy clothing and therefore, the quantity supplied of clothing increases significantly when the price decreases.
In conclusion, inelastic supply is when the quantity supplied is not very sensitive to changes in price and the supply curve is relatively steep. Examples of goods with inelastic supply include basic staples such as food, fuel, and energy. On the other hand, elastic supply is when the quantity supplied is very sensitive to changes in price and the supply curve is relatively flat. Examples of goods with elastic supply include luxury items such as jewelry, cars, and clothing.
Formula of Inelastic supply
The formula for inelastic supply is:
Where Qs is the quantity supplied and $P$ is the price. This formula measures how sensitive the quantity supplied is to changes in price. If the ratio of the change in quantity supplied to the change in price is less than 1, then the supply is considered to be inelastic.
When to use Inelastic supply
Inelastic supply should be used when the price of the good is expected to remain relatively stable over time. This is because when the price of the good is stable, the quantity supplied will remain relatively stable as well. Additionally, inelastic supply should be used when the cost of production is relatively high and when the demand for the good is relatively low. This is because when the cost of production is high and the demand for the good is low, there is less incentive for producers to increase supply when the price increases.
When to use Elastic supply
Elastic supply should be used when the price of the good is expected to fluctuate significantly over time. This is because when the price of the good is volatile, the quantity supplied will also fluctuate in response to the changing price. Additionally, elastic supply should be used when the cost of production is relatively low and when the demand for the good is relatively high. This is because when the cost of production is low and the demand for the good is high, there is more incentive for producers to increase supply when the price increases.
Types of Inelastic supply
- Perfectly inelastic supply: In this situation, the quantity supplied is completely unresponsive to changes in price. This means that no matter how much the price changes, the quantity supplied remains the same. An example of a good with perfectly inelastic supply is water.
- Relatively inelastic supply: In this situation, the quantity supplied is somewhat responsive to changes in price, but not as much as with elastic supply. This means that when the price of a good changes, the quantity supplied does not change significantly. An example of a good with relatively inelastic supply is bread.
Inelastic supply can be represented mathematically using the equation $Q_S = k$, where $Q_S$ is the quantity supplied and $k$ is a constant. This equation shows that the quantity supplied is not affected by changes in price.
Advantages of Inelastic supply
- Price stability: goods with inelastic supply are less likely to experience large price swings since the quantity supplied does not significantly change with price changes. This can help to reduce price fluctuations and provide a more stable market.
- Reliable revenue: goods with inelastic supply will generate a steady stream of revenue since the quantity supplied does not significantly change with price changes. This can be beneficial for businesses as it allows them to better plan their finances and budget.
- Reduced risk of market failure: goods with inelastic supply are less likely to experience market failure since the quantity supplied does not significantly change with price changes. This can help to reduce the risk of market failure and ensure a more efficient allocation of resources.
Disadvantages of Inelastic supply
- Higher prices: goods with inelastic supply are more likely to experience higher prices since the quantity supplied does not significantly change with price changes. This can lead to a less competitive market and higher prices for consumers.
- Higher profits: goods with inelastic supply are more likely to generate higher profits since the quantity supplied does not significantly change with price changes. This can lead to a less competitive market and higher profits for businesses.
- Reduced consumer choice: goods with inelastic supply are more likely to have less choices for consumers since the quantity supplied does not significantly change with price changes. This can lead to reduced consumer choice and a less competitive market.
Limitations of Inelastic supply
- The quantity supplied does not change significantly when the price changes, so producers may not be able to take advantage of higher prices to increase their profits.
- Inelastic supply makes it difficult for producers to adjust their production levels to accommodate changes in demand.
- Consumers may be forced to pay higher prices for goods with inelastic supply, as producers may not be able to increase their supply when prices rise.
In conclusion, inelastic supply is a situation where the quantity supplied is not sensitive to changes in price, and elastic supply is a situation where the quantity supplied is very sensitive to changes in price. While inelastic supply may have some advantages, it also has some limitations, such as making it difficult for producers to adjust their production levels and forcing consumers to pay higher prices.
There are a few other approaches to analyzing inelastic supply:
- Price elasticity of supply: Price elasticity of supply is the measure of how much the quantity supplied of a good changes in response to a change in price. If the quantity supplied is not very sensitive to changes in price, then the price elasticity of supply will be low.
- Cross-price elasticity of supply: Cross-price elasticity of supply is the measure of how much the quantity supplied of a good changes in response to a change in the price of another good. If the quantity supplied is not very sensitive to changes in the price of another good, then the cross-price elasticity of supply will be low.
In conclusion, inelastic supply is a situation where the quantity supplied is not very sensitive to changes in price. Price elasticity of supply and cross-price elasticity of supply are two measures that can be used to analyze inelastic supply. Examples of goods with inelastic supply include basic staples such as food, fuel, and energy, while examples of goods with elastic supply include luxury items such as jewelry, cars, and clothing.
Suggested literature
- Dougan, J. D. (1992). Inelastic supply: An economic approach to simple interval schedules. Journal of the experimental analysis of behavior, 58(3), 415-429.
- Karagiannis, G., & Furtan, W. H. (2002). The effects of supply shifts on producers' surplus: the case of inelastic linear supply curves. Agricultural Economics Review, 3(389-2016-23396), 5-11.
